Martin Lewis: Got a cash ISA? You should probably ditch it 26 April 2022 at 10:36AM in Martin's blogs & appearances & MoneySavingExpert in the news 7 replies 1.7K views

MSE_Petar

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Martin Lewis: Got a cash ISA? You should probably ditch it

Please click 'post reply' to discuss below.

Patparker

Could you advise please as a pensioner my annual income is less than the personal tax allowance, but this year interest in savings will be more than the £1000. Can the balance of my personal tax allowance be offset against my savings interest . If not then an ISA would be my best way forward 

MovingForwards

Patparker said:

Could you advise please as a pensioner my annual income is less than the personal tax allowance, but this year interest in savings will be more than the £1000. Can the balance of my personal tax allowance be offset against my savings interest . If not then an ISA would be my best way forward 

The last post on this thread

https://forums.moneysavingexpert.com/discussion/6355312/personal-savings-allowance#latest
Has a useful link

pipeup

I usually agree with Martin, but this is very bad advice in my opinion. We are just at the start of BOE interest rate rises, with a further rise likely tomorrow (Thurs 5th May) and more in the coming months, and although this advice might have been appropriate a few years ago that timing has now passed. 

The main thrust is that to ditch ISA's, is bad advice. Firstly anyone paying 40% only has a £500 savings allowance so it is even more pertinent to retain their ISA's. Secondly, even for people paying the lower 20% tax rate and having the £1,000 savings allowance, it is still beneficial to retain their ISA's. This is because of the most important fact that; 'ONCE SAVINGS ARE REMOVED FROM THE ISA UMBRELLA IT CANNOT BE RETURNED AND FUTURE TAX SAVINGS ARE LOST FOREVER' (current year savings can be put back ONLY IF it was in a flexible ISA). This fact is incredibly important and has, I feel, been glossed over by Martin in his advice.

Given the permitted annual ISA of £20,000, even with the £1,000 savings allowance, it does not take a massive increase in interest rates for people to start having to pay tax on their savings, if they have removed those savings away from the ISA umbrella.

The current BOE base rate is 0.75% (4th May), with expectations it will increase to 1% tomorrow (5th May). The increases are an effort by the BOE to try and curb inflation, and until inflation displays a significant reduction, further increases in BOE base rate are likely with general consensus of a minimum 1.5%-2% base rate before the end of 2022, whilst the OBR has suggested that interest rates could reach 3.5% before year end. Given the forecast scenario in increased BOE base rates, it is highly likely that savings rates will also rise. Savings rates have already risen from the lows seen in recent years, several times in some cases.

Today's Cash ISA rates are around 1% and, as Martin highlights, are below the current best buy non-ISA saving rate of 1.5%. However the next best non-ISA rate is 1.25%, then 1.2% with Marcus coming 5th in the table at 1%, the same as its ISA rate. What I am trying to highlight is that 1.5% offered by Chase is out on its own and it does not even offer an ISA. This offering is high to entice new savers by a new entrant to the UK market, just as Marcus offered the best rates a few years ago as a new entrant. These top non-ISA savings rates are NOT typical savings rates. A few years ago, perhaps even before Martin started moneysavingexpert.com, there was a great hoo-ha over the differential between ISA and non-ISA instant access interest rates, so much so that there was intervention from somewhere (can't recall which/how Government/Governing Body intervened), that they were equalled up and remained that way until recent years. It would not surprise if this occurred again. 

If the BOE base rate rises above 2%, then it is highly likely that Cash ISA rates will also be above 2% meaning that anyone with savings above £50,000 will start losing out and be paying tax on savings interest IF they have ditched their ISA’s, and that is the maximum savings. If interest rates get to 3% everyone with savings over £33,333 will have to pay 20% tax on their savings. 

Cash ISA’s and previous incarnations have been available for 30 years. Over that period, people could have saved quite large amounts of money, or even if they have not yet they might still in the future. To just throw away previous years ISA tax free savings in exchange for a 0.5% short-term difference in interest rates is nonsensical in my opinion. 

Martin could do much better by campaigning for ISA interest rates to be roughly equal/comparable with non-ISA interest rates, which I believe will happen automatically (if nudged a bit from relevant quarters), rather than advising people to ‘ditch their ISA’s’. 

I close with the important message to remember: 'ONCE SAVINGS ARE REMOVED FROM THE ISA UMBRELLA IT CANNOT BE RETURNED AND FUTURE TAX SAVINGS ARE LOST FOREVER' (current year savings can be put back but ONLY IF it was in a flexible ISA).

Dazed_and_C0nfused

Patparker said:

Could you advise please as a pensioner my annual income is less than the personal tax allowance, but this year interest in savings will be more than the £1000. Can the balance of my personal tax allowance be offset against my savings interest . If not then an ISA would be my best way forward 

You won't actually pay any tax on taxable (non ISA) interest unless your total taxable income is more than £17,310 (£18,570 if you haven't applied for Marriage Allowance).

You are almost certainly not able to use the savings nil rate of tax (aka Personal Savings Allowance).  Simply because you have no need to.

Any unused Personal Allowance can be used by the interest and then you have the savings starter rate of tax where upto £5,000 of interest is taxed at 0%.  If your earnings or pension income is less than your Personal Allowance then you have the full £5,000 to use before you can use the savings nil rate (PSA).

Dazed_and_C0nfused

pipeup said:

I usually agree with Martin, but this is very bad advice in my opinion. We are just at the start of BOE interest rate rises, with a further rise likely tomorrow (Thurs 5th May) and more in the coming months, and although this advice might have been appropriate a few years ago that timing has now passed. 

The main thrust is that to ditch ISA's, is bad advice. Firstly anyone paying 40% only has a £500 savings allowance so it is even more pertinent to retain their ISA's. Secondly, even for people paying the lower 20% tax rate and having the £1,000 savings allowance, it is still beneficial to retain their ISA's. This is because of the most important fact that; 'ONCE SAVINGS ARE REMOVED FROM THE ISA UMBRELLA IT CANNOT BE RETURNED AND FUTURE TAX SAVINGS ARE LOST FOREVER' (current year savings can be put back ONLY IF it was in a flexible ISA). This fact is incredibly important and has, I feel, been glossed over by Martin in his advice.

Given the permitted annual ISA of £20,000, even with the £1,000 savings allowance, it does not take a massive increase in interest rates for people to start having to pay tax on their savings, if they have removed those savings away from the ISA umbrella.

The current BOE base rate is 0.75% (4th May), with expectations it will increase to 1% tomorrow (5th May). The increases are an effort by the BOE to try and curb inflation, and until inflation displays a significant reduction, further increases in BOE base rate are likely with general consensus of a minimum 1.5%-2% base rate before the end of 2022, whilst the OBR has suggested that interest rates could reach 3.5% before year end. Given the forecast scenario in increased BOE base rates, it is highly likely that savings rates will also rise. Savings rates have already risen from the lows seen in recent years, several times in some cases.

Today's Cash ISA rates are around 1% and, as Martin highlights, are below the current best buy non-ISA saving rate of 1.5%. However the next best non-ISA rate is 1.25%, then 1.2% with Marcus coming 5th in the table at 1%, the same as its ISA rate. What I am trying to highlight is that 1.5% offered by Chase is out on its own and it does not even offer an ISA. This offering is high to entice new savers by a new entrant to the UK market, just as Marcus offered the best rates a few years ago as a new entrant. These top non-ISA savings rates are NOT typical savings rates. A few years ago, perhaps even before Martin started moneysavingexpert.com, there was a great hoo-ha over the differential between ISA and non-ISA instant access interest rates, so much so that there was intervention from somewhere (can't recall which/how Government/Governing Body intervened), that they were equalled up and remained that way until recent years. It would not surprise if this occurred again. 

If the BOE base rate rises above 2%, then it is highly likely that Cash ISA rates will also be above 2% meaning that anyone with savings above £50,000 will start losing out and be paying tax on savings interest IF they have ditched their ISA’s, and that is the maximum savings. If interest rates get to 3% everyone with savings over £33,333 will have to pay 20% tax on their savings. 

Cash ISA’s and previous incarnations have been available for 30 years. Over that period, people could have saved quite large amounts of money, or even if they have not yet they might still in the future. To just throw away previous years ISA tax free savings in exchange for a 0.5% short-term difference in interest rates is nonsensical in my opinion. 

Martin could do much better by campaigning for ISA interest rates to be roughly equal/comparable with non-ISA interest rates, which I believe will happen automatically (if nudged a bit from relevant quarters), rather than advising people to ‘ditch their ISA’s’. 

I close with the important message to remember: 'ONCE SAVINGS ARE REMOVED FROM THE ISA UMBRELLA IT CANNOT BE RETURNED AND FUTURE TAX SAVINGS ARE LOST FOREVER' (current year savings can be put back but ONLY IF it was in a flexible ISA).

The problem is that everyone's circumstances are slightly different and for a lot of people even the £1,000 savings nil rate is irrelevant.

To be able to use the savings nil rate band you have to fully used both your Personal Allowance and the savings starter rate.  

So the savings nil rate (aka Personal Savings Allowance) is only of use to people whose taxable income is more than £17,570 (or £16,310 if you have applied for Marriage Allowance).

ACynic

Aside from the correct point about £1,000 (or £500) not being much if interest rates go up, I think there should also be more made of the fact that non-ISA interest is still taxable income, even if covered by the PSA and so taxed at 0%. This distinction can have consequences if you are receiving benefits which are clawed back once you reach a certain taxable income threshold e.g.Child Benefit. 

If you are interested in pursuing higher instant-access savings rates and the fact the interest is taxable is not relevant at present, an answer is to find a flexible cash ISA, put as much in as possible on 5 April, then withdraw it on 6 April to put it in a higher paying account, remembering to refund the cash ISA prior to the next 5 April - rinse and repeat. That way you retain and accumulate the tax benefits for the future while maximising your current income, all for the sake of a couple of bank transfers once a year.

Martin's advice on so many other things is pretty finessed, so surprised he is being quite so blunt about this.

pipeup

ACynic said:

Aside from the correct point about £1,000 (or £500) not being much if interest rates go up, I think there should also be more made of the fact that non-ISA interest is still taxable income, even if covered by the PSA and so taxed at 0%. This distinction can have consequences if you are receiving benefits which are clawed back once you reach a certain taxable income threshold e.g.Child Benefit. 

If you are interested in pursuing higher instant-access savings rates and the fact the interest is taxable is not relevant at present, an answer is to find a flexible cash ISA, put as much in as possible on 5 April, then withdraw it on 6 April to put it in a higher paying account, remembering to refund the cash ISA prior to the next 5 April - rinse and repeat. That way you retain and accumulate the tax benefits for the future while maximising your current income, all for the sake of a couple of bank transfers once a year.

Martin's advice on so many other things is pretty finessed, so surprised he is being quite so blunt about this.

Good advice. Just make sure it is a flexible ISA that you open, as this strategy will not work with a non-flexible ISA where you will not be permitted to return previously withdrawn funds back into the ISA - read the small print to ensure it is flexible, as it is not always immediately obvious.

A small correction; you state 'put as much in as possible on 5 April, then withdraw it on 6 April', I think you meant to state 'put as much in as possible on 6 April, then withdraw it on 7 April' - an ISA tax year commences on 6 April and ends on the following 5 April.

A further point to remember if 'utilising' this strategy, is that you can only 'recycle' the current year's contribution up to the maximum amount of £20k. You are NOT permitted to recycle previous year's contributions that might make up part of the total amount held in the ISA.