Confused about ISAs

TooOrangeyForCrows

Hi. I am retired (and already pay tax on my pension) so any savings are also taxed.

I have a Santander current account that is only paying 2% interest - So I am probably wasting money having it all in that account.

I am a bit confused about ISAs and the £20,000 thing. Is this the maximum tax free amount one can invest (as in if you are getting 5% interest then the real tax free amount per year is £1000?).
Or is it that there is potentially (if you had £400,000 at the same 5% interest to invest) £20,000 extra to be earned per year tax free?

Secondly. Can one open a cash ISA at any time or does it have to be right at the start (or just before the text year). As I have heard people mention the tax year and that has confused me a little more.

Thirdly. Can I open a cash ISA at any bank or do I have to already have a current account with them first? 

And lastly do ISAs work in the same way as fixed saver accounts? As in I put some money in and then cannot touch it for the designated period. Say 12 months and then I can transfer it back to my account (if not done automatically).

I have just over £35,000 to invest. What would be the best thing to do? Thanks.

eskbanker

TooOrangeyForCrows said:

Hi. I am retired (and already pay tax on my pension) so any savings are also taxed.
Not necessarily: https://www.moneysavingexpert.com/savings/tax-free-savings/

I have a Santander current account that is only paying 2% interest - So I am probably wasting money having it all in that account.

I am a bit confused about ISAs and the £20,000 thing. Is this the maximum tax free amount one can invest (as in if you are getting 5% interest then the real tax free amount per year is £1000?).
£20K is the annual allowance, i.e. the maximum you can deposit in any tax year.

Or is it that there is potentially (if you had £400,000 at the same 5% interest to invest) £20,000 extra to be earned per year tax free?
If you'd accumulated a large balance over numerous years then the resultant income and/or growth is all tax-free, but the £20K limit applies to deposits, not to income generated.

Secondly. Can one open a cash ISA at any time or does it have to be right at the start (or just before the text year). As I have heard people mention the tax year and that has confused me a little more.
You can open one at any time - as above, the annual contribution limit is based on tax years.

Thirdly. Can I open a cash ISA at any bank or do I have to already have a current account with them first? 
Most cash ISAs are available to all, but sometimes there are products with preferential terms that are only available to current account holders, Virgin have one at the moment, for example.

And lastly do ISAs work in the same way as fixed saver accounts? As in I put some money in and then cannot touch it for the designated period. Say 12 months and then I can transfer it back to my account (if not done automatically).
Not quite - the ISA regulations require that money in ISAs must always be available, but fixed term ones will generally impose an early withdrawal penalty for doing so.  There are plenty of easy access ISAs though, if you'd prefer.

I have just over £35,000 to invest. What would be the best thing to do? Thanks.
If you wish to put up to £20K into an ISA then go ahead - the interest earned from the residual £15K should still not result in any tax bill, given the savings allowances described in the above link.

Answers inline above....

jimjames

TooOrangeyForCrows said:

And lastly do ISAs work in the same way as fixed saver accounts? As in I put some money in and then cannot touch it for the designated period. Say 12 months and then I can transfer it back to my account (if not done automatically).

No, you definitely shouldn't transfer it back to your account after 12 months. That would mean you lose the ISA status but you can transfer to another ISA once the fixed rate expires. There's lots of answers on this forum that might help with understanding the process for opening and managing an ISA.

TooOrangeyForCrows

Thanks for the answers. It seems I have got (had) the complete wrong end of the stick involving ISAs.

The only investments I have ever made have been a 6 month saver (with Monument at a really good 5.85% - I wish I had transferred more, but I was a bit sceptical about online and app based banks I had never heard of at the time) and when that expired I recently transferred that money into another 6 month saver at 5.18% and added a little more this time. 

Albermarle

TooOrangeyForCrows said:

Thanks for the answers. It seems I have got (had) the complete wrong end of the stick involving ISAs.

The only investments I have ever made have been a 6 month saver (with Monument at a really good 5.85% - I wish I had transferred more, but I was a bit sceptical about online and app based banks I had never heard of at the time) and when that expired I recently transferred that money into another 6 month saver at 5.18% and added a little more this time. 

That is fine and a lot better than the 2 % with Santander!

If you are unlikely to have to pay tax on interest, ( read the link in a previous post carefully) then having non ISA savings accounts is a bit simpler ( no rules about how much you can add etc) and transferring them is easier ( just withdraw to your current account and then make a deposit to a new one ).

However if you are likely to have to pay some tax on interest, then having some in an cash ISA is a good idea.
As already said do not withdraw from the ISA to your current account ( unless you really need the money ) if you want to transfer it .

Best savings accounts: 5.01% easy access or 5.25% fixed rates (moneysavingexpert.com)

Best cash ISAs: up to 5.17% easy access, up to 4.71% fixed - MSE (moneysavingexpert.com)