Following on from our article about Lifetime ISAs, this week we take a look at the ‘good old’ cash ISA.
The humble cash ISA has been on a journey over time. In 1990 John Major, in his only budget as Chancellor of the Exchequer, launched tax-exempt special savings accounts (TESSAs). These were open to anyone aged 18 or over, from 1 January 1991 to 5 April 1999.
At the end of the five year term you could withdraw all of the interest that had been earned tax free, and there was the option of ‘rolling over’ the capital into a follow-up TESSA.
TESSAs were eventually phased out, with maturing capital able to be rolled over into a TESSA only ISA (TOISA).
Next came Mini and Maxi ISAs – remember those?
Again, the rules were more complicated than the present situation. The allowance for Maxi ISAs was initially £7,000, which could contain up to £3,000 of cash. Alternatively you could open up to three mini ISAs, with up to £3,000 in cash, £3,000 in stocks and shares, and £1,000 in insurance based products – an option which was seldom used.
In April 2007 the terms “mini” and “maxi” were abolished, replaced with the Cash ISAs and Stocks and Shares ISAs with which we are by now familiar. There were different limits on each until July 2014 when the regime was simplified further.
At this point the overall ISA allowance was increased to £15,000, which could be split between cash or stocks and shares in any proportion.
Despite initial scepticism then, ISAs have been a roaring success and are now a firm fixture on the financial landscape. The current ISA allowance is £20,000, and this can be split between the six (at the last count!) different types of ISAS: cash, investment, Junior, Lifetime, Help to Buy, and Innovative Finance.
Cash ISAs are however having a tough time at the present – struggling to keep up and seeing a net outflow of cash.
One of the main reasons for this is the introduction of the Personal Savings Allowance, launched in April 2016 – which means that basic rate tax payers can earn up to £1,000 of interest per tax year before any tax is due. Higher rate tax payers can earn up to £500.
With the prevailing low interest rates, individuals need to hold a very high level of cash to be breaching the personal savings allowance. With market leading easy access cash rates being about 1.3%, individuals would need easy access cash savings in excess of £75,000 before income tax was due. The demand for cash ISAs is therefore reduced at present.
The new generation of challenger banks are typically offering the best savings rates, yet many of these institutions choose not to compete in the ISA sphere, making the area less competitive. ISAs cost banks more to administrate, and the regulatory burden is higher, hence the banks would rather encourage savers to use other accounts.
So what to do?
At Eldon, we often have conversations with our clients about withdrawing from cash ISAs to hold cash elsewhere if better rates can be obtained. Given the long history of the ISA this is sometimes a counterintuitive concept for savers, who have in previous years have maximised the annual ISA allowance, and enjoyed choosing the best rates for their hard earned savings in “ISA season” between March and May, when banks would typically vie for your custom.
There remains some benefits to cash ISAS. They have to allow individuals access to savings, even if there is a penalty, whereas fixed rate bonds in non ISA accounts do not have to provide any access. And for keen savers who are earning interest in excess of the personal savings allowance, ISAs may pay a better net return (after income tax).
We have been living in a low interest environment for some time, but it is unlikely that this will be maintained forever. If interest rates do increase, cash ISAs could fall back into fashion, and of course there’s no guarantee that the Personal Savings Allowance won’t go the way of the TESSA at the stroke of a Chancellor’s pen!
In any event though we’ll continue to help clients make the most of their hard earned -so if you would like to chat about your cash accounts, please call us at any time.