We've looked into the essentials of Stocks and Shares ISAs, but what about Cash ISAs? Though there may be little incentive to save your hard-earned cash with bank accounts offering interest rates below inflation in some cases, Cash ISAs can still come in handy if you have a near-term goal or need to set up an emergency fund (conventional wisdom points to a three months' earnings to cover you in case of an emergency such as job loss).
What is a Cash ISA?
A Cash ISA is a standard bank or building society savings account, often also offered by supermarkets and other retailers as well as financial advisers, that is shielded from tax by being in an ISA wrapper. This means that you won't have to pay income tax on any interest accrued.
Cash ISAs are available to any UK resident over the age of 16 (although many are only available to those over 18) and you can invest up to £5,100 in the current (2010/2011) tax year, rising to £5,340 after April 5.
What to Look For in a Cash ISA
How much does it pay? The most obvious thing to look for when selecting a Cash ISA is the rate of interest that it pays. You can find lists of the best rates currently available in many newspapers and financial websites. Remember that in most cases the interest rate will be variable so the amount of interest paid can change.
Some providers offer introductory bonus rates that are withdrawn after a certain amount of time. Once these bonus rates expire, the interest rate may seem less attractive.
Some providers also offer tiered interest rates for higher investment amounts. Hence, you need to be sure the interest rate you are looking at is relevant and appropriate for the amount you are going to invest.
How can I invest? Like all savings accounts, most providers offer traditional “branch saving”. However many providers also offer “internet only” Cash ISAs, which generally have a slightly higher rate of interest compared to the branch account.
When can I get my money out? The majority of Cash ISAs are instant access, meaning you can take your money out at any time without loosing interest. However, just like with regular savings accounts, there are some that offer a higher rate of interest if you are willing to commit your money for a longer term, or if you are able to tell the provider in advance when you want to withdraw your money.
As an example, there are Cash ISAs that require you to leave your money invested for three years in a similar way to a building society bond, or require you to give 30 days notice of an intended withdrawal.
Is it a pure Cash ISA? There are a number of products available that offer a Cash ISA with a comparatively high rate of interest but also require you to make an equivalent investment in another financial product (usually stock market based) from the same provider.
Can I transfer money in from another Cash ISA? Many Cash ISAs allow you to transfer money into them from another provider's ISA. This transaction is not always free of charge so be sure to check the fees information regarding cash transfers.
Is My Money Safe?
Historically, the answer to this question has always been a resounding 'yes' and savings accounts have been considered effectively zero-risk investments. The events of the last few years have made many people question whether this is the case and if there is such a thing a zero-risk investment.
Nevertheless, all UK based savings accounts are guaranteed by the government up to £85,000 of cash deposits via the default via the Financial Services Compensation Scheme.
