When do I know which is best? Saving or ISA

electricdove

I left work with a lump sum and put it into an instant access savings account which now pays 5.1%. Is it better to leave it there or to regularly take £3000 for an ISA? Would I make more on the bigger sum - on which I pay tax - or in a tax free ISA. Is there a breaking point (there is for me - wish I was a financial whizz kid!). I suppose it depends on how much there is in the first place. Any ideas?

TBeckett100

the 5.1% i presume will be taxable, so net that down by around 20% to get a tru return. The Cash ISAs will give you a tax free interest so that is likley to be a higher rate than the net amount from your bank. You are limited to £3k in a Cash Mini ISA.

If you are not paying tax you should leave enough in there there generate interest to use your nil rate band and then do an ISA.

I would seek advice, but someone would need to know how much we are talking about here to make sure you are using up all allowances available.

ReportInvestor

The best accounts available at the moment tend not to have tiered interest rates for larger amounts.

Such structures tend to be the preserve of building society notice accounts (which offer worse rates even to the rich).

So the simple answer is "yes". You are best off, as a taxpayer, making full use of your mini-cash ISA allowance each year. [This assumes that you have already taken the decision to keep the money in cash accounts.]

And even if you aren't a taxpayer & are currently unemployed, you could become a taxpayer in future when you draw any work or state pension. So it could still be worth building up a tax free lump sum.

Tip:

If you need to use some of this money to live on, don't withdraw the ISA interest which can roll up. Rather use the interest and a small part of the capital in your non-ISA cash fund. That way you get a greater percentage into your ISA more quickly.

Jake'sGran

I am a non-taxpayer but always use my ISA mini cash allowance each year and most years I also use the balance of the ISA allowance to buy equities.
Many advisers say that non taxpayers don't need to use their ISA allowance but I have found that for cash the rates are often as good as an ordinary Internet savings account so I might as well use it and not have to worry about having to show it on any tax return I complete.

Maybe Reportinvestor would not agree with my thinking on this subject but if I had not used Tessas, Peps and finally ISAs I believe I would be paying a lot of tax by now. I do appreciate that there are some charges on the PEPs and ISAs invested in equities but by using a discount broker these are kept to a minimum.

ReportInvestor

I generally approve of your strategy, JG.

Keeping stuff off your tax return under the regime of "Gordon the Great Tinkerer" has much merit .

david78

ISA first every time.