A cash ISA is a low-risk method of saving tax-free. Cash ISAs provide a low-risk option for growing your savings, without having to pay tax on the interest.
You can have a look at the cash ISAs available at the end of this page.
5 key factors for a cash ISA are:
- Types. The types of cash ISA can be broken down further as follows:
- Easy access. Your money is instantly accessible, but the amount of penalty free withdrawals you can make in a time period is limited. You will receive an interest penalty if you exceed the allowable number of withdrawals.
- Instant access. Your money is instantly accessible. You can make as many withdrawals as you like without notice, penalty or charge.
- Notice account. You have to give a notice period to withdraw your money (30, 60 or 90 days are most common).
- Fixed term. Your money is fixed in the account for a period of time (one to 5 years are common). Many of these accounts won't allow you to add money after your initial deposit, or to withdraw money until the term ends. Some will allow you to withdraw money before the term ends but you will incur a significant penalty on the interest.
- Opening balance. The details of the account will make it clear what the minimum amount required to open the account is (there are plenty of accounts that only require £1).
- Interest rate. Interest is expressed as a percentage followed by AER (annual equivalent rate). For example, 3% AER - this means you'll get £3 interest a year for every £100 that you have had in the account for 12-months. If your money has been in the account for less time when the interest is paid, the interest payment is adjusted to reflect that. Types of interest are:
- Fixed. A fixed rate of interest won't change over the agreed term of the ISA.
- Variable. A variable interest rate will move up and down over time. In general, if the Bank of England Base Rate (BBR) goes up, the interest rate will go up and vice versa. However, it may not be directly linked like a tracker.
- Tracker. A tracker interest rate follows an index proportionally. For example, BBR Tracker rate will explain in the small print how exactly it tracks the BBR (such as BBR minus 1.5%). If the BBR goes up, as it has done recently, the tracker interest rate also increases.
- Protection scheme. Ensure the ISA is protected by the Financial Service Compensation Scheme (FSCS). If your provider goes bust (it happens!), you should be compensated for all the money you have in the account up to £85,000.
- ISA Transfers in. Applicable if you are moving money from another ISA - ensure the new provider accepts transfers from your existing cash ISA or stocks and shares ISA.
As a general rule:
- Easy access, instant access and notice accounts tend to have a variable interest rate.
- Fixed term accounts tend to have a fixed or tracker interest rate
- The easier the money is to access, the lower the interest rate.
- Fixed term accounts have a fixed rate of interest for the period they are open.
- The longer the fixed term, the higher the interest rate.
Compound interest. This is a useful concept to understand for saving. It is explained in the
Savings Accounts Section.
ALWAYS READ THE TERMS AND CONDITIONS OF THE CASH ISA BEFORE YOU COMMIT
What I have done. I have a 16-month fixed term cash ISA. With the stock market volatility last year, I moved my money from my stocks and shares ISA to a cash ISA. I knew I wouldn't need access to the money for 16-months, and got a reasonable rate at the time of opening. I could have had a longer fixed term, but wanted to either put money back into stocks and shares, or see if cash ISA rates improved after the 16-month period.
