Many happy returns ISA

Cash ISAs offer security but rates may not always stay high

ISAs have just celebrated their first birthday and congratulations should be in order. While stocks and shares ISAs gained most of the publicity, cash ISAs have proved a quiet success. By December 1999, they had attracted £8.6 billion.

ISAs have just celebrated their first birthday and congratulations should be in order. While stocks and shares ISAs gained most of the publicity, cash ISAs have proved a quiet success. By December 1999, they had attracted £8.6 billion.

Cash ISAs offer the safety and security of a building society deposit account, but allow you to take the interest free of income tax. They are provided by banks, building societies and National Savings and are most suitable for cautious investors.

But falling foul of ISA rules is easy. A mistake made last year by many investors - thought to be more than 50,000 - was to open a mini-cash ISA account only to discover that this slashed the amount they could invest in stocks and shares. "As soon as you put even £1 in a mini-cash ISA you cut the amount you can invest in stocks and shares from £7,000 to £3,000," says Justin Modray, investment adviser with Chase de Vere.

There are two types of ISA. Mini ISAs allow you to invest up to £3,000 each year in stocks and shares, up to £3,000 in cash and up to £1,000 in life insurance in any tax year. You can buy each component from a different ISA manager. Maxi ISAs allow you to invest your full £7,000 annual allowance in stocks and shares. Alternatively you can invest up to £3,000 in shares, up to £3,000 in cash and £1,000 in insurance. All must be bought from the same manager. You cannot buy a mini ISA and maxi ISA in the same tax year.

Many savers wrongly think you have to tie your money up in a cash ISA for a set period, says Bhavesh Amlani, director of Simple Savings. "With most accounts you can withdraw it whenever you want. Any cash kept in a deposit account should therefore be kept in an ISA," he says.

However, while you can withdraw as much as you like with many cash ISAs, you cannot put in more than £3,000 each tax year. You should also watch for long notice periods and penalties for early withdrawal and keep an eye on rates, because they may not always stay high.

Coventry building society currently pays 7.75 per cent for its Privilege mini-cash instant access ISA, which is for existing members only. Alliance & Leicester pays 7 per cent on balances of £3,000, C & G also pays 7 per cent, but on a minimum balance of £1,000. Barclays Bank pays 5.75 per cent on balances of £500, but 6.75 per cent if you invest £3,000 and recently-launched internet bank Smile, currently trying to attract new customers, pays 7.25 per cent on balances as low as £1.

Anyone unsure which cash ISA to chose could go for one that meets the Government-set CAT standard, which ensures no charges, a minimum transaction size of £10, withdrawals within seven working days, and interest no lower than 2 per cent below base rate. But this does not guarantee the most attractive interest rate. The Portman building society pays 7.3 per cent but fails the CAT test, while the NatWest CAT-standard cash ISA pays 6 per cent.

Not everybody is in favour of cash ISAs. Alan Beestin, director of The ISA Shop, says the tax benefits can be over-rated. Interest of 7 per cent on £3,000 would earn £210 year. A basic rate taxpayer would pay 20 per cent of this to the Inland Revenue - just £42. "The real benefits ISAs bring are in avoiding capital gains tax on equity investments. Over the longer term, stocks and shares ISAs will bring much greater returns, and therefore much greater tax benefits, than cash ISAs."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Extras
indybest
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Soft Developer (4.0, C#, Windows Services, Sockets, LINQ, WCF)

    £65000 - £75000 per annum: Harrington Starr: .NET Developer (4.0, C#, Windows ...

    C# Developer -Winforms, VB6 - Trading Systems - Woking

    £1 per annum: Harrington Starr: A leading financial software house with its He...

    C #Programmer (.Net 4.0/4.5/ C#) -Hertfordshire-Finance

    £45000 - £50000 per annum: Harrington Starr: C #Developer (.Net 4.0/4.5/ C#, A...

    JQuery Developer JQuery, UI, Tomcat, Java - Woking

    £1 per annum: Harrington Starr: JQuery Developer JQuery, UI, Tomcat, Java - Tr...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

    eBay's enduring appeal

    The online auction site is still the UK's most popular e-commerce site
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

    Magic circles: Artist Olafur Eliasson

    Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home