Are ISAs still worth it?
Once upon a time ISA season really meant something, providers fought each other to launch accounts paying the highest amounts of interest and savers had their pick for where to put their ISA allowances each year. Now, it’s a different story. Rates have plummeted thank to the pandemic and with the introduction of the personal savings allowance, there’s less to shout about when it comes to ISAs. But is it time to give up on them altogether or do they still have a space in our savings goals? We investigate.
Please remember with any investment your capital is at risk.
What are the benefits of an ISA?
Individual savings accounts, or ISAs as they’re shortened to, have been around since 1999 offering a way to save without paying any tax on the interest. Every year a new limit is given to everyone in the UK and it’s currently £20,000 for this financial year. Anyone over the age of 16 can open an ISA and save this amount without paying tax on the interest. They have evolved over time and there’s now a range to choose from including:
- Cash ISAS, both easy access and fixed term
- Innovative Finance ISAs, or IF-ISAS such as easyMoney’s
- Stocks and shares ISAs for investing
- Lifetime ISAS, or LISAs, for saving towards your retirement or a home
- Junior ISAs, or JISAs, for children
Who still uses ISAs?
Rates may be dwindling but ISAs are still a popular choice for savers. Around £75billion was subscribed to adult ISAs between 2019 and 2020, an increase of £7.1billion on the previous year, according to the government. One of the reasons they remain a solid choice is because money is safe within an ISA, and it can gain interest.
But the economic climate has not helped ISAs. Inflation has soared recently and is expected to rise further. It rose to 5.5% in the 12 months to January and it’s impossible to open a cash ISA that can beat this rate.
Combined with high interest, the Bank of England has kept its base rate at a historically low level since the start of the pandemic in 2020. It’s inched up recently but unless it rises further it’s unlikely providers will start offering higher interest rates either.
However, there are other ISAs that might - at easyMoney you could get a projected return between 3% to 8% for example with an IF-ISA. While the money isn’t as secure as a cash ISA - and there is a risk it’ll be lost - this is a far more generous rate than many providers are offering.
What is the personal savings allowance?
Before the current economic issues, there was another reason ISAs were getting less attention than they usually do. That’s the personal savings allowance (PSA), introduced in 2016. It lets savers earn £1,000 in interest per year before paying tax if they’re a basic-rate taxpayer. This rises to £500 for higher rate taxpayers and those paying the additional rate don’t qualify.
It applies to pretty much any savings account or bank account where you can earn interest including peer to peer accounts. However, dividend income from investments is not included in this allowance.
The majority of savers won’t pay any interest on their savings interest because of the PSA. That's because you’ll need at least £10,000 before interest is applied - and at that point you could just move money into an ISA if you still have your allowance.
Is there any point in opening an ISA?
There’s a reason people are still opening ISAs and that’s because they have a valuable place when finding a home for a savings pot. While it creates a handy tax-efficient wrapper for those who have used up their PSA, for millions more it’s another option when looking for a home for their savings. The evolution of ISAs, with the introduction of things like the IF-ISA and LISA, mean there really is one to suit most savers.
However, with cash ISAs especially, as rates are so low it doesn’t need to be the only home for your savings. There are alternatives which can pay higher rates of interest and therefore having a combination of savings pots - in different accounts - could be the best way to maximise the amount of interest you can earn.
The most important aspects to look at when finding a new home for your savings is which providers pay the highest rates of interest, and what are the rules around access. You don’t want to open an account earning barely any interest which you can’t access for five years. As during this time rates may rise, and you will want to move your money into the best-paying account. Although always check the terms and conditions - you may be able to access the money with a small cash penalty which could be worth it depending on what’s happening with interest rates.
When it comes to interest rates, just because they’re currently low, this doesn’t mean they will stay at this rate forever. We’re going through a period of especially harsh economic conditions with the cost of just about everything increasing thanks to the cost-of-living crisis. This is expected to remain for quite some time but when the economy does pick up, it’ll be areas like ISA interest where changes will start to happen.
If you are interested in opening an IF-ISA, please check out https://easymoney.com/to find out more.
Invest now at easyMoney.com (Capital at Risk)
All the facts and figures presented are accurate at the time of posting.
easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated i n property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.
easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.