Mini-Cash ISAs

What are they:
Each tax year (April 6th to April 5th) everyone aged 16 or older gets a new Individual Savings Account, ISA, allowance. It’s a common misunderstanding ISAs are financial products in their own right, in fact they’re wrappers to put cash or shares or life assurance in so the tax man can’t get at it.

"Put simply mini-cash ISAs are savings accounts you don't pay income tax on."

Put simply, mini-cash ISAs are savings accounts you don't pay income tax on. Therefore there’s an extra 20% interest for basic rate and 40% for higher rate taxpayers. If you've any savings and weren't planning to use your ISA allowance without question open a mini-cash ISA. Even non-taxpayers benefit as the best cash-ISA rates are usually better than the best savings account rates. The only reason for not using a cash ISA would be if it were better used for share investment – see the ISA guide for details.

An annual £3,000 worth of cash may be saved in an ISA. The money may be withdrawn at any time without losing tax benefits, but it can’t then be returned to the cash ISA. An example should help clarify. Put £1,800 in and you’ve still £1,200 ISA allowance left, withdraw £1,000 from it, and you may still only contribute £1,200 more. The fact you’ve withdrawn the money doesn’t impact the allowance

How to choose a provider:
Choosing a provider depends primarily on interest rates, but watch for a number of tricks lenders use to confuse and complicate. The first is short term interest rate bonuses, these are hikes to attract your custom which soon disappear, so the interest rate quickly plummets below the advertised rate. Even more important for your long term financial fitness is watching the transfer penalties when you choose an ISA. You are allowed to change ISA provider and it should be easy. Some providers levy a fine when you leave them which may outweigh any gain you will make by moving. These may effectively trap you with a provider if it drops its rate, so check the penalties before you buy.

The only way to guarantee the rate won't drop is using a fixed rate mini-cash ISA, if you are willing to fix the rate for two or three years its likely your returns will be better than sticking with a standard ISA. The cost of this surety is the money must be locked in for the full term, so no early withdrawals.

Cash ISA Money Saving Checklist:

What is the interest rate? The higher the better
Is there a notice period? There's no problem with notice periods as long as the money won't be needed immediately. To be able to grab the cash immediately choose either an instant access account (which means you can walk into a branch and withdraw cash) or a no-notice account (postal or internet accounts, the money can be withdrawn without notice, but it will take a couple of days to send to you).
Does it have an introductory bonus? If it does work out the rate without the bonus. If it's low either choose another mini-cash ISA or note down when the bonus ends and be prepared to transfer.

Does it have transfer penalties? This could be the death knell as it locks you in to the cash ISA even if the rate drops avoid.