Cash in high-interest bank account moved to ISA

corne44

Hi all,

It's the first time I post in this forum so please pardon me if this question has been asked before. I did try to look for previous posts through the search option but didn't find anything.

My question related to 3 paragraphs in the Top Cash ISAs 2014/2015 page Section 6. They state:

"You also need to look at the bigger, long-term picture. Saving in a ISA guarantees tax-free status on that cash for as long as it's kept in a ISA. Interest on a current account is likely to be short-lived. Though in an ideal world, you'd have both. Try this:

First, put cash in a high-interest bank account. As long as the after-tax rate beats your chosen ISA, do this now rather than using your ISA allowance. See Current Accounts for the full options.

Then, use the cash to open a ISA in March 2015. A week before the tax year ends, move the cash out of the bank account to fill your ISA allowance. That way you get the short-term high rate from the banks, but you still get the tax-free benefit of your ISA allowance. See Martin's ISAs vs high-rate bank accounts blog from earlier in the year for full details."

What I don't understand is that if you have a high-interest bank account which even after the 20% tax (for lower band tax payers) - such as the First Direct 6% AER regular saver which works out at 4.8% AER after tax - beats the best ISA, why would you still need to transfer your net interest into an ISA since the 20% tax has already been applied and from what I understand, cannot be touched anymore by the taxman in the future.

I think the answer is in the first paragraph but I don't fully understand by what is meant by "the interest on a current account is short lived".

Thanks in advance for your help.

jimjames

corne44 wrote: »

Hi all,
What I don't understand is that if you have a high-interest bank account which even after the 20% tax (for lower band tax payers) - such as the First Direct 6% AER regular saver which works out at 4.8% AER after tax - beats the best ISA, why would you still need to transfer your net interest into an ISA since the 20% tax has already been applied and from what I understand, cannot be touched by the taxman in the future.

Simple answer - you wouldn't.

The MSE guides are misleading and will confuse people as you have found.

If you have under £15k then get the best rate you can wherever that is. If ISA rates ever increase then use an ISA, until then use the account paying highest rates.

corne44

Simple and clear. That's all I needed!

Thank you jimjames.

jimjames

corne44 wrote: »

Simple and clear. That's all I needed!

Thank you jimjames.

Check all the threads about high interest current accounts and reg savers.

You can get 5%, 4% and 3% current accounts as well as the reg saver at 6% you mention.

MSE may suggest they are short lived but they have been around for almost 3 years already, that is 3 years more interest than you'd have got in an ISA.

Rollinghome

corne44 wrote: »

What I don't understand is that if you have a high-interest bank account which even after the 20% tax (for lower band tax payers) - such as the First Direct 6% AER regular saver which works out at 4.8% AER after tax - beats the best ISA, why would you still need to transfer your net interest into an ISA since the 20% tax has already been applied and from what I understand, cannot be touched anymore by the taxman in the future.

The point the article is making is that if your annual ISA allowance, currently £15k, isn't used within each tax year then it's lost. Next year you will have a similar allowance but any unused allowance for this year can't be carried forward.

That's why the article suggests transferring cash from an interest-paying current account right at the end of the tax year, before the entitlement for the year is lost.

Whether that's the best course for you depends on your situation: such as how much you are able to save each year but also on how long cash ISA rates are likely to be lower than rates obtainable elsewhere.

Most people are probably likely to benefit over the long term by building up their tax-free ISA pot as much as they can, even if that means slightly lower rates of interest at some point. Especially if they pay above the standard 20% rate of tax.

But that may not apply to anyone who can't save the the maximum ISA allowance each year anyway. If you can only save £4000 a year you could ignore your ISA allowance for 2 years and still get all your savings into an ISA in year 3.

A cash ISA may also be of less benefit if you'll need your savings quite soon, such as for a house deposit. The real benefits of ISAs tend to be longer term.

It's for you to take a guess on how long the best rates will remain above ISA rates and then do the sums on your best option.

corne44

Thanks for this Rollinghome.

Rollinghome wrote: »

But that may not apply to anyone who can't save the the maximum ISA allowance each year anyway. If you can only save £4000 a year you could ignore your ISA allowance for 2 years and still get all your savings into an ISA in year 3.

What about if the highest interest rate bank account in 3 years time is still higher after tax than the best ISA account (considering they both allow earning interest on the entire £12,000), would you still do that?

Rollinghome

corne44 wrote: »

What about if the highest interest rate bank account in 3 years time is still higher after tax than the best ISA account (considering they both allow earning interest on the entire £12,000), would you still do that?

Not necessarily. You might calculate that all your savings for the next 5, 10 or even more years could be swept up with your ISA allowance for just two or three years once ISA rates improve. In which case you'd be better off getting the highest rate after tax, whether or not in an ISA, at least until that point.

The calculation depends on how much you save, what you intend to do with the money, and the various rates available. It's further affected by your tax rate both now and in the future so a crystal ball might be useful. Remember that the full ISA allowance can now be used for a cash ISA or a stocks and shares ISA and can be switched at any point between the two.

The article should have pointed out that much depends on individual circumstances.

jimjames

Rollinghome wrote: »

The article should have pointed out that much depends on individual circumstances.

I think that's the key issue that I have with the articles on MSE about cash ISAs.

Rather than stating (as it does) that EVERYONE should get a cash ISA at all costs to avoid losing it, there really should be some clarification that an ISA isn't best for those with small amounts of money to save.

When most people (nearly 70%) have under £2000 in savings it stands that for most people the article is wrong and only a minority of people would benefit from a cash ISA at the moment.

corne44 wrote: »

What about if the highest interest rate bank account in 3 years time is still higher after tax than the best ISA account (considering they both allow earning interest on the entire £12,000), would you still do that?

I'd still go for the highest paying account. When you can get £30,000 into an ISA over 2 years there are very few that will need to put that sort of amount in.

If wanting money long term then a S&S ISA is probably the more appropriate option and those definitely are worth using an ISA allowance for.

corne44

Not necessarily. You might calculate that all your savings for the next 5, 10 or even more years could be swept up with your ISA allowance for just two or three years once ISA rates improve. In which case you'd be better off getting the highest rate after tax, whether or not in an ISA, at least until that point.

But why would the future possibility of ISA rates improving be a concern to me now? Is it because once a ISA is opened, it will earn the same rate forever? If this is the case, yes it would make sense to put money there instead to avoid potential future lower bank account interest rates.

The calculation depends on how much you save, what you intend to do with the money, and the various rates available. It's further affected by your tax rate both now and in the future so a crystal ball might be useful. Remember that the full ISA allowance can now be used for a cash ISA or a stocks and shares ISA and can be switched at any point between the two.

Noted about the flexibility to move money between cash and S&S ISA. Ignoring this, I'm still not totally clear why a cash ISA would be useful over a higher interest current account. Even long term, surely you would just switch your money from current account to ISA, and vice versa whichever has the highest rate (for your respective tax rate)? How does the time factor affect your decision?

When you can get £30,000 into an ISA over 2 years there are very few that will need to put that sort of amount in.

Are you suggesting that ISA are a good option if you have big savings? Assuming you can open all the necessary accounts of the method on the page "60 Second Guide: 5% savings loophole" which shows how to earn high interest on up to £19,000. This is more than the ISA annual allowance of £15,000. If this method was valid year after year, would there be any other reason to still get an ISA? (ignoring the higher potential gains with a S&S ISA).

At the end of the day, I have a very small capital ~£2000 and plan to save for around 3 years to get a mortgage, so a high current account is probably best for me now. But I would like to understand at which point an ISA starts to be interesting.

Thanks both for your answers so far.

Vortigern

corne44 wrote: »

Is it because once a ISA is opened, it will earn the same rate forevger? If this is the case...

This not the case. ISA interest rates inevitably fall at the end of the the fixed rate or bonus period.

corne44 wrote: »

But I would like to understand at which point an ISA starts to be interesting.

If you had to accommodate a large inheritance, a redundancy payment or a pension commencement lump sum you would soon fill all the high interest current accounts.

If you are a higher rate taxpayer ISAs might be worthwhile (but pension contributions could be better)

jimjames

corne44 wrote: »

Are you suggesting that ISA are a good option if you have big savings?

At the end of the day, I have a very small capital ~£2000 and plan to save for around 3 years to get a mortgage, so a high current account is probably best for me now. But I would like to understand at which point an ISA starts to be interesting.

Thanks both for your answers so far.

If you have £80,000 in cash ISA savings as some people may do that they have build up over the last 20 years then taking it out to put into a current account means they can't easily get it back into an ISA if rates increase.

If you have £2000 then a cash ISA is totally pointless and current accounts will be the best option., By combining 2 accounts (TSB and Halifax) you can get around 8-9% return on your money. No other accounts come anywhere close. Part of that return is the fixed £5 per month from Halifax so as a percentage it will drop as your balance goes up.

If you have a big savings balance outside an ISA then you can only put £15,000 in every year anyway, in that situation you might want to feed it in gradually so it is protected from tax even if it means you get a poor return at the moment.

However far too many people just pile their money into cash ISAs and leave it for years or decades when a S&S ISA would be a more appropriate option for beating inflation.