Why cash ISAs aren't dead yet
Cash ISAs have been proclaimed dead and buried by savings market commentators thanks to the introduction of a new personal savings allowance; but we shouldn't write them off just yet.
Chancellor George Osborne's decision to introduce a personal savings allowance means basic rate taxpayers can earn £1,000 of interest on their savings tax-free and higher rate taxpayers can earn £500.
With low rates on both bank savings accounts and cash ISAs it is difficult to understand why you'd save into a cash ISA when you can get tax-free interest in your bank. A blurring of the lines further is that ISA money can now be taken out without any loss of allowance, meaning cash ISAs and bank accounts are looking decidedly similar.
So which one is best, ISA or bank account?
Many would argue that for long-term, diligent savers, a cash ISA is still a better bet. The simple fact is the allowance on the ISA is £15,000 and will increase while the tax-free allowance on bank accounts is £1,000; and while that £1,000 may be enough to cover off your interest when rates are at rock-bottom, what happens when they rise?
If we return to higher interest rates and therefore more generous rates on ISAs and bank account, that £1,000 may not go as far. If an account paid 3% - which they were in the not too distant past – a basic rate taxpayer would only have to have £35,000 in cash before they exceed the £1,000 limit. Half that sum if you're a higher rate taxpayer.
Receiving 3% on £35,000 in a cash ISA means all your interest is free.
Of course, there are those who will argue that you shouldn't be sitting on so much cash but there are many people out there cautious about investing in stockmarkets and for whom cash will always be king.
The other worry about savings changes is that they can be changed back. ISAs have been around for a long time, they are popular and people understand them so they have always escaped any detrimental tinkering – the same may not be able to be said of the savings allowance.
Who knows what a future government could do to reverse the allowance.
And what will the banks do to make a couple of quid out of this plan? Will the best paying savings accounts be restricted to paid-for current accounts in future – decent cashback accounts charge a monthly fee for use.
Keeping money in your bank account is good for emergencies but my guess is cash ISAs will up their gain to remain the go to wrapper for cash savings.
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