Cash ISA vs savings accounts: Which is better?
The one that pays out most!
The world of savings has been quite bleak for the past few years, with meagre interest rates on offer for savers. Deciding between a cash ISA and a normal savings account, however, isn’t as tricky as it seems. In our guide to savings accounts vs cash ISAs we take you through what each are and the pros and cons of both.
What is a savings account?
As the name suggests, a savings account is a bank account that’s designed to hold your savings.
Unlike with a current account, you don’t get a debit card and you won’t be able to receive your salary in it or set up direct debits or standing orders. Instead, you can only withdraw or deposit money in it. In exchange for keeping your savings there, you’ll earn an interest rate.
What is a cash ISA?
A cash ISA is a savings account where you don’t pay tax on the interest you earn. Everything you can do with a normal savings account you can do with a cash ISA. The tax-free bit is the only real difference.
Any person over 16 in the UK can put £20,000 into a cash ISA each tax year. Once your money is in a cash ISA, it stays tax-free year in year out.
Savings accounts vs cash ISAs – what’s the difference?
In normal savings accounts, you’d get taxed on whatever you earned in interest. A cash ISA lets you keep 100% of the interest, which is why it has been a popular option among UK consumers for years.
Fixed savings accounts bring better returns
Those who can afford to lock away money can get a better rate. The obvious down side is that the money is locked away. Customers don’t have access to funds until the end of the committed term.
Some ISAs allow for flexible access to the cash, but this is reflected in usually lower interest rates.
Current accounts can offer joining bonuses
Current accounts are the account you use for day to day personal finances. They can sometimes offer even higher returns compared to ISAs and savings accounts.
This is usually through either interest rates, though it’s also important to take joining bonuses into account. Some banks will give new customers hundreds of pounds if they meet certain criteria (usually you have to earn over a certain amount).
Don’t rule out the ISA yet
While better rates can be found if shop around, ISAs are still appealing to a lot of people. Here are a few reasons why:
- Long term tax shelter. By topping up your ISA, you can ensure long-term protection, even though interest rates might be poor.
- You can inherit ISAs. ISAs can be passed on after death, which is not the case with all savings vehicles.
- ISAs are immune to tax thresholds. A pay rise could see you tip over the taxpayer threshold. This makes no difference to what’s held in an ISA.
- Flexible ISAs. You can now take money out of ISAs and replace it in the same tax year without impacting your allowance. Rules around this vary from provider to provider, so make sure you check before withdrawing money.
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