Is a Cash ISA Worth It?

7 Reasons Why You Might Not Want to Open a Cash ISA

  • In most cases, a Cash ISA shouldn’t be used for long-term savings as typically the interest rate is lower than the rate of inflation.
  • A more convenient option for long-term saving would be a Stocks & Shares ISA.
  • While a Cash ISA should be used for short-term saving goals this comes with the caveat of eating into your personal allowance.

 

Is a Cash ISA Worth it?

Cash ISAs or Individual Saving Accounts (introduced in 1999) are a  type of savings account with a twist. You are able to save money into this type of account with no fear of paying income tax on any interest received during the tax year.

 

Furthermore, investing into a Cash ISA comes with lower risk than other types of accounts as there is no investment made with the cash within the account.

Cash ISAs are traditionally viewed as ‘risk-free‘ because the balance of your account will never decrease.

 

Also, cash ISAs are backed up by the Financial Services Compensation Scheme with compensations up to 85,000 pounds. FSCS can be viewed as a kind of insurance for your account and is a must when looking at financial products.

 

These features may already sound attractive to the average person. However, like most attractive schemes, cash ISAs have their own unattractive downsides that could make you think twice about opening such an account.

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This article will answer “Is a cash ISA worth it?

The short answer is usually no, and here is why.

 

Cash ISA Interest Rates Do Not Help You With the Soaring Inflation

 

When answering the question  ‘are cash ISA worth it’, you might probably be happily earning your introductory rate although there is no real growth factor in this since Cash ISAs offer very little for their savers.

 

Their best deals barely make it to the 1% mark and will quickly dive down to a very unattractive 0.1% p.a as soon as the introductory period ends.

This, along with the ever-rising inflation, will push savers into a very tiny and unhappy space where their money is not multiplying as expected.

In 2021, the UK experienced an inflation rate of 5.4% over 12 months. The increasing prices of goods far outweighed even the highest interest rates offered.

 

Your Cash Really Doesn’t Mean Much to Banks

 

Most high street banks and building societies offer very meager savings rates, sometimes even as low as 0.25%.

They seem to be mostly uninterested in acquiring new savings account customers (believed by most to be the major source of money available for lending).

These banks have enough money being already rotated in their systems to support their lending purposes. This is enough reason for them to keep their rates low.

Cash Limits for the 2022/23 Tax Year

The Government, for the tax year 2022/23, has kept the limit of £20,000 which can be contributed to the range of ISA accounts available to UK residents. With the Cash ISA having such low-interest rates, especially when compared to inflation, you may be inhibiting your long-term growth by using up some of your total ISA allowance with a Cash ISA instead of other ISA options.

 

You Have to Follow Strict Rules

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Savers using Cash ISAs have to abide by strict rules which is clearly not an easy task. They must consider:

  1. Who is allowed to open a Cash ISA
  2. The amount payable for each tax year
  3. How many Cash ISAs can one person maintain
  4. The time before withdrawing money.

Breaking these rules such as maintaining more than one Cash ISA with several providers, could get you on the radar of HMRC at the end of each tax year.

Money withdrawal will be impossible if you exceed limits before the end of the tax year. It could even end with any extra money being withdrawn from your account.

Better Uses for Your Saving Allowances

Most cash savers expect almost no returns and people who use a cash ISA are no different. It actually does not save you from tax if you consider the bigger picture.

In April 2016 a Personal Savings Allowance (PSA) was introduced and as a result the majority of savers in the UK no longer have to pay tax on their savings income.

The basic-rate taxpayer qualifies for a £1,000 PSA which means if you are a basic-rate taxpayer, you are allowed to earn £1,000 in interest before you have to start paying tax.

For the Higher-rate taxpayer, the PSA is £500 per year. While additional rate taxpayers do not receive a PSA and must pay tax on any savings income they receive outside an ISA.

 

You Have More Convenient Options with Stocks & Shares ISAs

 

Is a cash ISA worth it compared to an investment ISA

For long-term goals, the more convenient option would be with a Stocks & Shares ISA. Opening an account only takes a few minutes and there are many more options out there than the simple Cash ISA.

Though when investing your capital is at risk you also have a lot better chance of maintaining your money against inflation or even beating inflation and growing your money.

There are brokers which offer Stocks & Shares ISAs which help you pick the kind of investments that suit your risk tolerance and goals.

Typically you have to pay a small annual fee for the management of your account/investment but this is usually outstripped by gains within the account.

The flexibility of Stocks & Shares ISAs is such that you are allowed to withdraw your money at any given time without the fear of receiving a penalty.

Investing is Always a Better Long-Term Plan

Given the low-interest rates with Cash ISA as returns, it is always a better choice to invest your money, especially through a tax-efficient account such as the Stocks & Shares ISA.

However, there is still the risk that you’re account may produce a lower capital amount as it comes with higher risk as investing relies upon the market of stocks. As opposed to the traditional ‘risk-free’ view of the Cash ISA.

However, if you are looking for a long-term plan, investing is the optimum decision.

According to a Barclay’s survey that has been active for 10 years, you have a 90% chance of getting better returns from an investment when compared to a Cash ISA.

 

Conclusion

In conclusion, the Cash ISA should only be used for short-term savings as using the Cash ISA over a long period of time will result in you losing purchasing power against inflation.

This is why we believe that for long-term goals the Stocks & Shares ISA is much better suited. While the Cash ISA can be viewed as a ‘safe bet’ due to the fact that the amount within the account cant go down, it is a poor way to build wealth, especially over the long term.

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