MONEY COMMENT
A Safe Haven For Your Cash

By Cliff D'Arcy
February 27, 2003

The last month or so before the end of the Tax Year on 5 April is traditionally the time when many investors take the plunge and use up their tax allowances before they expire - the allowances, that is, not the investors!

ISAs come in two sizes: maxi (up to £7,000 a year) and mini (up to £3,000 a year). They also come in three flavours: shares/funds/trackers (up to £7,000 and which we look at in this article), insurance (up to £1,000 – not terribly popular) and cash. It's important to understand that an ISA is just a tax-free wrapper around these three main investments.

Now get this: a Cash mini-ISA allows you to shelter up to £3,000 a year free of tax. Even better news: these are "headline" products for most savings institutions, so they often receive the best rate of interest that these companies have to offer.

Some Cash ISAs do have certain restrictions on withdrawals but, in the main, they are often as flexible as a standard instant-access deposit account.

So, no tax and the best rates of interest; why doesn't everyone have a Cash ISA in preference to a normal savings account - where's the catch? None, it's just that some savers take a while to catch on to the best deals (ISAs were only introduced in 1999, when they replaced PEPs and TESSAs).

For example, take my parents, who are extremely conservative investors. Their total exposure to the stock market consists of a few mortgage endowments and my mother's small personal pension. They've never owned shares, other than those acquired when their local electricity company was privatised and from the demutualisation of Abbey National (LSE: ANL) in 1989.

Because of their aversion to riskier investments, my parents pretty much ignore financial advertising and comment - including columns like this, I suspect! They've always put their money on deposit and considered themselves to be savers, not investors.

So, despite my advice over the years, they've never considered investments other than cash, so I've given up any hope of changing their minds. However, I have succeeded in convincing them of the merits of Cash mini-ISAs.

I explained that, together, they can save £6,000 a year in Cash mini-ISAs by transferring money from their existing building society account, which pays around 3% annual interest (2.4% after deduction of 20% savings tax). Each year, they receive 6000 x 2.4% = £144 a year in interest.

In a Cash mini-ISA, they can get up to 4.5% tax-free interest, boosting their annual interest from £144 to £270. That's almost double the amount, with no need to declare this income on Tax Returns.

Another bonus is that my parent's Cash ISA account obeys the CAT standards, so it's actually more accessible than their deposit account. Also, they understand that once money has been withdrawn from a Cash ISA, it cannot be replaced. Thus, they use their Cash ISAs as "rainy day" money, untouched except for emergencies.

So, if the stock market halving over the last three years has left you wary of shares, why not consider a Cash mini-ISA? They really are some of the best low-risk investments around.

Learn more about Cash ISAs here or visit our ISA centre.