Should I put cash in an ISA or regular savings account?
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I have about £10,000 in my current account at the moment that I would like to put into some kind of savings account. I may not need to have access to it but it is my rainy day fund so I don’t want to tie it up in anything complicated. Should I put it into an ISA or a normal bank savings account? I know that the interest is likely to be tax-free whichever option I choose. I don’t have any other savings accounts at the moment.
Phil Beck from Smith & Pinching responds:
I’m often asked if it’s still worth saving in Cash ISAs now that the first £1,000 you receive in savings interest is free of tax – if you are a basic rate taxpayer. My response is usually: yes, ISAs are still a valid way to save your money for three main reasons.
Firstly, however large your savings may grow over time, if they are in an ISA, the interest they earn will remain free of tax.
Secondly, the personal savings allowance reduces to £500 if you are a higher rate taxpayer and to nil if you are an additional rate taxpayer, so the danger of you paying tax on your savings will increase as your earnings rise. It is worth remembering that the Chancellor froze the tax thresholds for higher and additional rate taxpayers in his March 2021 Budget until 2026 following a small increase to the higher rate threshold for 2021/22, so any pay increases you may receive in the interim could potentially tip you into a higher tax bracket.
Thirdly, there is always a chance that the threshold for the Personal Savings Allowance may be changed at some stage in the future – particularly as successive governments attempt to reduce national borrowing.
It’s worth making the point here that with interest rates still low, cash savings struggle to keep pace with inflation, so may potentially lose value in real terms over time. I absolutely appreciate your wish to retain an emergency cash fund in case of need, but it’s important to keep the right balance of savings and investments if you are looking to build your wealth. I recommend that you get independent advice to build a savings and investments plan that gives you both the security for that rainy day and the potential for growth.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk