Cash ISAs vs. Regular Savings Accounts 1
Deciding between an ISA and a Regular Savings Account – what should you do?
When comparing an ISA and a regular savings account there is one main benefit that an ISA can offer you. That benefit is that you don’t pay any tax on the interest that you earn.
But how does this work in practice? This comparison guide to savings accounts and ISAs is brought to you by moneysupermarket.com, the price comparison website.
The best regular saving accounts available offer the highest rates of interest. If you were basing your decision entirely on the interest rate on offer then a regular savings account would be the choice for you. However, as with all regular saver accounts, the interest you earn will be taxed. If you were to save your money in an ISA account the interest would be tax free.
On top of this, there are plenty of other catches. You have to put money into the account regularly, which may not always be possible. You cannot put in a lump sum to start with either and the maximum amount you can deposit each year is also kept relatively low as well. Interest is paid after 12 months. It’s not always easy to withdraw your money from regular savings accounts with some accounts you must give a few months notice and with others you can’t withdraw your money during the first 12 months at all, this is not suitable for everybody.
If you do not like the idea of having your money locked away then you might find it easier to open a cash ISA account. Cash ISAs are tax-free, which makes them an attractive option to many people. Although you can get some regular saver cash ISAs amongst other types of Cash ISA, most are easy access meaning you can transfer money out whenever you need it.
Like regular savings accounts you can still only deposit a fixed amount per year, but the two main advantages are that you can add the same amount each year and you can do it as a lump sum if you find it easier, so you benefit from the interest on the whole lot for a full year. Also, unlike regular savings accounts the money isn’t transferred to an account with a worse interest rate after a year, although you should keep an eye on rates to make sure yours is still competitive.
Overall easy access or regular savings accounts are like easy access cash ISAs, except you pay tax. The interest rates are similar to ISAs, which means after tax you do in fact lose out.
The number of reasons to invest in a cash ISA rather than a regular savings account are growing all the time. Currently most adults save up to £7,200 in ISAs every year. The whole amount can be invested in a stocks and shares ISA or you could split it and put up to £3,600 in a cash ISA. In October 2009 everybody aged 50 or over was allowed a higher annual limit of £10,200, of which up to half can be saved as cash. In order to take advantage of this, you will need to be 50 on or before April 5 this year, to benefit in the current year. On April the 6th 2010 this is set to change; the limit will be increased to the same amount for everybody, regardless of age.
Interest rates are up and down in the current financial climate which means that some savers could benefit from changing who they bank with. Changing account providers for an ISA account is not quite as easy as switching a standard savings account as once the money is taken out of the account, the holder loses all the tax benefits they would have had. This can be prevented by insuring that your old provider and new provider pass on all the information about your account history.
It is worth comparing providers before deciding to open a Cash ISA. Cash ISAs can make a dramatic difference to the amount you save, so choosing the right one for you is important. Compare cash ISAs at moneysupermarket.com to get all the latest deals.
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