FOOL SCHOOL
ISAs: Cash ISAs

March 20, 2002

The Cash component of an ISA operates in exactly the same way as if you were putting money into a building society savings account that pays interest (only this time, you don't pay tax on the interest). So whether you've gone for a Mini Cash ISA (one little teapot) or you've decided to save some cash inside a Maxi ISA (a teabag in a big teapot), this component works in exactly the same way. You simply get interest on your money.

The limit for contributions to a Cash mini or to the Cash component of a Maxi is £ 3,000 per year.

Finding The 'Best' Cash ISA

Obviously what you are looking for here is the best interest rate possible at the time of opening the ISA, as well as an interest rate that remains good in future. The second bit is trickier because you don't know what your chosen financial institution will do with its rates. So it's difficult to say what the best product is -- you can only say what is best at the current time. Online accounts tend to pay higher rates and you should be able to find an ISA that pays more than the current Bank of England Base Rate.

If there is a guaranteed or bonus rate make sure you check how long that rate will continue for. Banks have a habit of attracting you with pretty rates in big newspaper adverts and then quietly cutting them by sending you a boring letter that you throw in the bin because you think it's a circular.

To help you find the highest payers "Best Buy" tables are published regularly in the weekend money sections of many major newspapers. And many financial websites will have similar information.

Keep An Eye On Your ISA

Should the interest rate fall, or fail to rise in line with others on the market, you can switch your cash ISA to a bank or building society that offers a better rate. All you do is tell the new bank that you want to switch your ISA to them and they will help you to arrange the transfer of your savings for you. On no account should you close your cash ISA, withdraw the money and try and put it into a new ISA.

As we've seen there is a limit to how much you can contribute each year -- it's a one-off shot -- so the money you've saved always needs to be transferred to the new ISA and not withdrawn. You want your money to remain safely inside your ISA while you switch it to a different location. Some ISAs make a charge if you decide to move your funds. You may have to check the small print to find this. These accounts are best avoided.

One extra point about cash ISAs is that, ordinarily, you have to be 18 to open any kind of ISA. However, anyone aged 16 or over can open a Cash ISA. Obviously, this will only be useful to those who earn enough to pay tax anyway.

More: Find out how to get your free ISA guide | The ISA Centre