With interest rates on everyone’s lips, and many people giving up on saving and withdrawing their cash ISA savings, we look at the pros and cons of keeping your ISA.
Why are people dropping their cash ISAs?
uSwitch research found that 38% of savers are planning to ditch their tax free cash ISA accounts – almost half of these people said they would be doing so because of low interest rates, while 18% said it was because they needed the extra cash and 4% because they believed they can get a better deal elsewhere.*
With an average cash ISA balance of £2,200, that means that savers will withdraw a total of £9.5 billion and will lose out on £196 million of tax-free interest.
Why should I keep my cash ISA?
While interest rates on cash ISAs have suffered because of the Bank of England base rate being at historic lows since 2009, dropping your ISA could prove to be a costly mistake.
Some of the highest ISAs currently pay as much as 2.5% AER, which means savers investing the maximum £15,240 could earn £381 in tax-free interest, compared to the 0% that many typical current accounts offer.
To earn equivalent to the tax free 2.5% interest from an ISA, savers would need to find an account paying more than 4% interest for higher tax brackets, or over 3% for lower rate tax payers.
However, recently some high interest current accounts have been offering rates which could give better returns than ISAs, so it could be worth looking at these.
What should I do now?
Currently, only around a third of households in the UK have any kind of ISA, meaning millions of people are missing out on earning interest and a much-needed tax break.
If you don’t have an ISA already, consider applying now – if you were to put your full cash ISA allowance into an account paying 2.5%, you would earn an extra £381 a year – tax free.
If you already have a cash ISA, remember cash is a low risk investment and rates may be low for the time being, but they should pick up in the long term.
If you think you could get a better rate you could look at transferring your ISA to an account paying a better rate of interest.
* Research from Research Now carried out for uSwitch with 2011 consumers on 6th February 2009