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What are the benefits of a cash ISA?

Wondering if it’s worth having a cash ISA? We explore the pros and cons of Individual Savings Accounts. This guide will help you decide if it’s right for you.

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Individual Savings Accounts (ISAs) are popular with savers because of their tax efficiency.

There are several different types of ISAs available. Each type has advantages and disadvantages, with some being more suited to specific savings goals and risk appetites than others.

The four ISAs for adults are cash ISAs, stocks and shares ISAs, innovative finance ISAs, and lifetime ISAs.

In this guide, we’ll focus on cash ISAs.

What are the main advantages of a cash ISA?

There are various benefits of cash ISAs, and their importance will depend on your circumstances and the reasons you want to save.

Some of the main advantages include:

  • Tax-free — As with all types of ISA, you can save tax-free. For 2023-2024, you can invest up to £20,000 in ISAs without paying tax on the interest you earn. You also don’t need to declare your cash ISA on a tax return, so that’s one less bit of admin to worry about.
  • Variety available — There are several different cash ISA options: fixed accounts offer a guaranteed interest rate in exchange for locking your money away for a set period, easy access accounts let you pay funds in and withdraw at any time, and regular savings cash ISAs encourage you to save a fixed amount each month. This means you can find the one that works best for you.
  • Access to funds — At Shawbrook, if you have an easy access account, you can withdraw your money whenever you need it (subject to minimum withdrawal requirements). You can use this type of ISA for earning interest on savings that you may need to access at any moment.
  • Easy to transfer — Another benefit of a cash ISA is that you can easily transfer between providers. As long as your ISA is not fixed for a certain time, you can move your ISA to a more attractive interest rate without losing your tax-free allowance. If you do this, make sure you transfer your ISA properly. Withdrawing money from an ISA and reinvesting in another ISA will count towards your tax-free allowance, but a transfer will protect the money’s status. If you want to transfer a cash ISA to Shawbrook, simply let us know when you open an account with us.
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Is it worth having a cash ISA?

Whether a cash ISA is right for you will depend on your situation. You should always weigh up the pros and cons before investing.

Cash ISAs are typically best for those who are risk-averse and comfortable with accepting lower interest rates in exchange for security and, in some cases, easier access to their funds. If you are looking for a potentially higher return and are willing to accept the risk of losing your money, you may find that another type of ISA suits you better.

In terms of the tax benefits, ISAs are a tax-efficient way of saving in the UK — regardless of whether you’re a basic, higher or additional rate taxpayer. Even if you’re not a taxpayer, they still have advantages. This is because the money you invest with your annual allowance will keep its tax-free wrapper for future years. So, the money you invest in an ISA this year will continue to earn tax-free interest next year and beyond (providing you don’t withdraw the funds).

Can you lose money in a cash ISA?

The money you invest in a cash ISA is secure, and the money you hold can not go down, but it can with a stocks and shares ISA.

The Financial Services Compensation Scheme (FSCS) also protects your investments up to the value of £85,000. So, even if the worst-case scenario happens and the financial institution that holds your ISA goes bust, you will still be able to recover your funds — as long as the scheme covers the provider.

Be sure to check whether the FSCS covers your ISA before investing, as this may affect your decision. The FSCS covers all banks, building societies and major financial services institutions.

It’s important to note that although you cannot lose money if your account is protected by the FSCS and you do not hold over £85,000, the value of your money can decrease in real terms. This is dependent on whether the interest you receive is less than the rate of inflation.

Considering a cash ISA?

At Shawbrook, we offer cash ISAs to suit different needs.

If you’re interested in learning more about our accounts and the interest rates available, visit our cash ISAs page.

Find out more about our cash ISAs and the rates available