Low interest rates have made it a tough environment for savers looking for a good return on their nest egg in recent years. That said, if you have spare cash to put away for a rainy day, it makes sense to take advantage of the tax-free options provided by cash ISAs, so here's what you need to know, and where to find some of the best deals on the market this year.
What type of cash ISA?
There are three main types of cash ISA available, and which one you choose will depend on your personal requirements. The instant cash ISA, for example, allows easy access to your money in case of an emergency, so you can withdraw cash at any time without paying a charge. Alternatively, you can go for a notice cash ISA, where you'll need to give between 30 and 120 days notice before you can get your hands on the money. Lastly, a fixed-rate cash ISA typically offers the best interest rates, but your savings will be tied up for anywhere from one to five years, so it's more of a long-term option.
Whichever option you choose, you can invest up to £15,240 in the 2015/2016 tax year. This total tax-free allowance can be used wholly in either a cash or stocks and shares ISA, or split between the two.
Easy access best buys
HSBC Loyalty Cash ISA
HSBC's Loyalty Cash ISA offers a variable rate of 1.6 per cent, though this rate is only available to Premier Customers. However, you can open an account with as little as £1, and then take advantage of the 1.1 percent bonus rate for 12 months (0.5 per cent thereafter). Alternatively, Advance account customers will get a 1.5 per cent rate, while current account customers get 1.4 per cent interest. None of the above require any notice to access cash.
National Savings & Investments Direct ISA
NS&I's own Direct ISA might not offer the full 1.6 per cent achieved by HSBC's Premier Customers, but its 1.5 per cent rate (variable) is available for the lifetime of the product. Once again, you'll only need £1 to kick off and there's no upper limit or notice period required. The only downside is that it's only accessible by phone or online.
Fixed rate best buys
United Trust Bank 5-year fixed rate
Currently the best interest rate on offer at 2.75 per cent, the United Trust Bank's five-year cash ISA is sadly unavailable online, so you'll need to open the account either by post or in person at a branch. You'll also need to have a minimum of £5,000 to deposit on opening an account (transfers from other providers are accepted), but you won't be allowed early access to your cash. If you're happy to leave your cash in the account for five years, you'll get a reasonable return on your investment.
Alternatively, you can get a five-year fixed rate of 2.30 per cent at the Leeds Building Society with a minimum deposit of just £100.
Coventry Building Society 4-year fixed rate
Coventry BS' fixed rate of 2.25 per cent is currently the best four-year deal on the market. You can open the account with just £1 and manage online or in branch, but transfers-in from other providers are not accepted.
The Post Office 3-year fixed rate
With its growing range of financial products, the Post Office tops this year's three-year and two-year fixed rate ISAs. Tie your money in for three years and you'll get a rate of 2.1 per cent, but you'll need to need a minimum deposit of £500 and you'll need to open the account by post. The two-year rate from the Post Office offers savers 1.95 per cent with the same minimum deposit of £500. Transfers-in from other providers are accepted in both cases.
Julian Hodge Bank 1-year fixed rate
Currently the market leader for one-year fixed deals, the Julian Hodge Bank is offering 1.65 per cent, but you'll need an initial investment of £5,000 to take advantage and you can only open and manage the account by post.
If that's an inconvenience, Virgin Money might prove a better option. With online access and a minimum opening balance of just £1, you can grab a 1.6 per cent rate and transfers-in are accepted.
Have you got your eye on a cash ISA this year? Leave your comments below...