Isas could be still worth it depending on your financial situation and how risk-averse you are. Example: the lifetime ISA bonus of £1000 may be worth it to someone who is risk averse but to someone who wants potentially more gains the lifetime ISA may not be worth it as their capital can be utilised better.
After the government introduced the personal savings allowance of £1,000 in 2016 there was a drop in the amount of people who had or applied for ISAs by 1.6 million.
This drop was simply because the personal savings allowance meant you could earn £1,000 tax-free on any savings account. With this in mind, many people were wondering why they should lock their savings away in ISAs as they were not worth it anymore in comparison to other saving accounts with similar or better rates.
What is a cash ISA?
A cash ISA is a savings account which you don’t pay tax on. You could pay your yearly ISA allowance of £20,000 (as of this tax year) into a cash ISA and all your earnings will be tax-free.
With a cash ISA, you can take your money out without any penalty.
You can also transfer your cash ISA to ISA providers who are providing better rates by asking the cash ISA you want to move to, to transfer your ISA for you.
Is an ISA worth it?
Well, since the personal savings allowance (which came in April 2016) which allows you to earn £1,000 tax-free in interest on any savings account without paying any tax.
This means basic taxpayers don’t have to pay any interest on their ISA, higher rate taxpayers will have a personal allowance of £500 and if you earn above the higher rate for taxpayers you will not get a personal savings allowance.
This means most people will not have to pay tax on the interest generated with their ISAs or other cash-saving accounts.
So for most people, ISAs are essentially pointless as you can save in any other account and get the same benefits of an ISA except if the ISA pays a higher rate of interest but ISAs don’t pay a higher rate of interest so ISAs aren’t worth it anymore.
Due to how low the rates are for ISAs you will need to save about £95,000 to earn the £1,000 tax-free personal allowance on your ISA interest.
The only time ISAs may be worth it is if interest rates rose on ISAs to about 7%. At this point, your ISA allowance of £20,000 will be able to generate you more than the £1,000 tax-free personal allowance for savings interest.
Until this point, ISAs, unfortunately, aren’t worth it.
While ISAs aren’t worth it now if you continuously put money in your ISA and built up over £20,000 in your ISA then you may protect yourself from future tax in a scenario the interest rate on ISAs went back up but this is a big if.
This essentially means you will have earned enough to offset any tax loss you may incur in the future due to an increase in interest rates. In this instance, ISAs may be worth it for now but that’s a big “may”.
The general rule here is if you have £20,000 then you are better putting your money in the best savings account and not necessarily an ISA that could not be worth it.
Can compounding make ISAs worth it?
Due to the effects of compounding, you could reach your personal savings allowance in interest earnings in a few years by saving the maximum allowed under your ISA each year and not withdrawing your money.
But even without ISAs being worth it, you could still save on your ISA and save on another savings account due to the fact that the personal savings allowance of £1,000 does not actually include ISAs.
Interest earned on ISAs is tax-free by default.
This means you can save up to £20,000 a year in an ISA and also earn up to £1,000 a year tax-free interest from another type of savings account.
Different ISAs for different goals
A traditionally ISA may not be worth it to you as you might be saving for a home and in that case, a help to buy ISA which offers a maximum bonus of £3,000 or lifetime ISA which offers a £1,000 goverment bonus per year could be more ideal.
These ISAs could be more worth it as they help you achieve a specific goal and are built for those exact use cases.
ISAs are flexible
Due to the fact that you can withdraw your ISAs at any point without any penalties, you may consider ISAs as being worth it although not all providers will allow you to withdraw your money from your ISA and you can not only withdraw your money from an easy access ISA but you can withdraw your money from other ISAs such as fixed-term cash ISAs, help-to-buy ISAs and even stocks and shares ISAs.
You can transfer your ISA
With ISAs you aren’t tied down to any one provider, you can ask a different ISA provider who you see offering better rates to switch your ISA to them. In this case, many people may consider ISAs as being worth it.
If you are married and your partner dies you may also be able to inherit their ISA and still retain your tax-free status.
Are ISAs a good investment?
In some regard, they still are as you can use your ISA allowance to invest in a lot of innovative ways.
There is now the innovative finance ISA Also known as a P2P ISA which lets you use your ISA allowance to invest in peer to peer lending.
You cannot use the Personal Savings Allowance with investments or P2P lending, but you can use your ISA allowance to make your innovative finance ISA tax-free.
Are ISAs still tax free?
Yes, ISAs are still tax free and any interest earned on your ISA is tax free.
Are ISAs better than savings accounts?
At the moment not so much. ISAs are just as good as saving accounts in some cases, in other cases, ISAs are better than saving accounts and in some cases, ISAs are worse than saving accounts.
There really isn’t a particular theme.
Can I pay into 2 Cash ISAs?
Yes but you can only pay into one cash ISA per tax year. To pay into two cash ISAs you will need to pay into them in two different tax years.
The ISA rules allow you to open one ISA account each year although you can transfer an ISA from a previous tax year into a new cash ISA or other ISA account as long as you don’t pay into the old ISA account.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.