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Should we dump our cash #Isas?

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I have a cash Isa but frankly, I do wonder why I bother. I'm getting just 0.75% interest on it. And it seems I am not alone. According to Moneyfacts, the typical easy access cash Isa paid just 0.82% last year. Although rates have now increased a bit overall (fixed and variable) the typical Isa rate is now 1.09%.

And before you all rush to open up a cash Isa, remember that inflation is currently 3%. So if you get 1.09% on your cash Isa and that rate stays unchanged for a year then if you invested £1,000 on 1 January 2018 then on 31 December you would have £1,010.90. But then if inflation stays at 3% over that time your £1,000 on 1 January would by 31 December only be worth £970.

Along with most Isa savers I guess it was the tax-free temptation that attracted me: interest is free from capital gains and income tax (but not inheritance tax). But when interest rates on cash Isas are so low the tax benefits are negligible. Indeed you would do better in a taxable account in some cases. Currently the best rate on a one-year fixed rate Isa is 1.45% from the Post Office or 1.16% from a variable account, the AA Easy Access account. But you can get 1.9% fixed for a year from Atom Bank in a taxable account. If you pay basic rate tax the Atom rate is 1.52%, still better than the cash Isa. And remember, if you are a basic rate taxpayer you can earn up to £1,000 a year in interest without paying tax anyway.

As far as I am concerned, I should certainly be thinking about transferring my cash Isa to a better deal (check out the savings rate tables at www.thisismoney.co.uk). I do need cash savings and after all, a cash Isa is really just a savings account. If you have a variable rate cash Isa then you can get at the money easily. However, I should add that in the last few years I've not added any new money to my cash Isa, instead opting to invest in a share Isa. If you want to consider a share Isa, see our guide here

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Thursday, 13 December 2018