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Choosing a suitable Cash ISA

Cash Individual Savings Accounts (ISAs) are among the most straightforward investment products on the market. Cash ISAs are designed to appeal to investors who want to take less risk, but also want their cash savings to work as hard as possible in a tax-efficient way. At present, the upper limit for a cash ISA investment is £5,940 although, from 1 July 2014, your annual total ISA allowance will increase to £15,000. Under the ‘New ISA’ (NISA) rules, you can save the entire £15,000 in a cash ISA, and there are ways to improve on the average rates available by considering what you need from your money.

Different investors have different needs. If you can only invest small amounts of money, need full, instant access to your cash, and want an account that offers a debit card, you are likely to pay the price for this flexibility with a relatively low interest rate. Nevertheless, you will still benefit by paying no income tax on that interest, and this will be particularly beneficial for those paying tax at 40% or 45%.

However, you might find that, by tying your money up for a longer period – perhaps placing it in a cash ISA account that requires 60 or 90 days’ notice – you could earn a higher rate of interest. Internet-only accounts also often pay a relatively high rate of interest. Whichever approach you choose, it is worth keeping an eye on interest rates, particularly if you have taken advantage of an introductory bonus or a short-term guarantee. Typically, when these offers expire, you are left with a less competitive interest rate.

As an alternative to building society and bank accounts, cash ISAs can be invested in certain National Savings & Investments (NS&I) accounts. These are backed by HM Treasury and can be invested in money-market instruments. Meanwhile, at the more exotic end of the market, structured products are available that can qualify for ISA investment. These products are not strictly ‘cash’ but may offer some form of capital protection. However, some use complex market instruments and can be riskier than they initially appear. They are unlikely to be a straight substitute for a cash ISA, but can offer a more managed risk/reward profile for a certain type of investor. For expert advice or further information, speak to your financial adviser.

The contents of this article should not be construed as advice and do not necessarily reflect our views. Financial Advice should always be attained in order to assess your own individual circumstances.