Troubleshooter: Can I open two cash ISAs to take advantage of rising rates?
“I have two fixed rate cash ISAs that I opened a few years ago. They both pay 0.5% interest and mature in the next financial year.
I hold £55,000 in one account and £75,000 in the other. Would I be allowed to open two new cash ISAs in the next tax year and transfer money from the old ones? Could I then contribute money from other non-ISA accounts into the two new ISAs I have set up?
The reason I want to keep the pots of money separate in two accounts from different providers is because of the £85,000 limit for the protection of savers’ funds under the Financial Services Compensation Scheme.
I’m quite happy to keep my funds in cash ISAs rather than stocks and shares because I’m a low-risk investor.
I am also aware that interest rates are on the rise, so I only want to lock in an interest rate for one year.
The troubleshooter says:
Now that savings rates are rising, cash ISAs are becoming more popular for people who want to avoid paying income tax on their interest.
Basic rate taxpayers can earn up to £1,000 in savings interest each financial year before having to pay income tax. This is known as the personal savings allowance. The limit drops to £500 for higher rate taxpayers and high earners receive no allowance.
But ISAs are exempt from this rule, which means you don’t pay tax on the interest earned, which makes cash ISAs especially attractive to the wealthiest in society. For more information on the Personal Savings Allowance, read our guide.
You receive an ISA allowance of £20,000 each year. Yet, there are many rules regarding ISAs that you need to be aware of.
Crucially, you can only open one ISA of each type in a tax year. This means that you would not be allowed to open two new cash ISAs in the next fiscal year, which begins on April 6, 2023.
However, moving your money from one ISA to another is different: since you would only be moving ISA money that you have saved in previous years, this does not count as opening a new ISA. So to answer your question, you are allowed to transfer the money from both of your accounts to new ISAs in the same tax year.
When you have decided which ISA provider you want to switch to, you need to contact the company and complete their transfer form. He will then handle the transfer on your behalf. It may take 15 days for cash ISAs.
It is important that you go through the transfer process rather than moving the ISA money yourself, otherwise you lose the annual allowance from previous tax years.
For more information on ISAs and the different types, read our guide.
You also asked if you could top up your new cash ISAs with money from other bank accounts. This brings me to another rule: you can only contribute to one of each type of ISA in a tax year.
So if you wanted to supplement the savings of your two ISAs with cash, you would need to choose one to contribute.
After contributing money to this ISA in cash, you would not be allowed to complete the other in the same tax year.
Merging your two pots into one ISA cash might make them easier to manage. But I also appreciate your argument for wanting to maximize the protection offered by the FSCS. This program protects deposits up to £85,000 if your supplier goes bankrupt.
Splitting your savings between two companies gives you £85,000 protection on each pot.
It’s worth checking the primary company that owns your ISA provider to make sure you’re getting the most comprehensive protection possible. This is because the limit applies to all accounts you have within a group.
For example, Lloyds, Halifax and the Bank of Scotland are all part of the same group. So if you were to split your savings of £135,000 between these banks, the FSCS would only cover you up to £85,000.
You locked in your current rate of 0.5% when rates were at an all-time high, meaning you only earn £675 a year.
But now that rates are climbing, you could earn thousands of pounds on your big savings pot. The best one year fixed rate ISA is from Shawbrook Bank and pays 3.9% and the second best is from Kent Reliance which pays 3.85%. We describe the Highest rated cash ISAs.
But don’t forget that inflation is currently over 10%, more than double the highest rates on savings accounts. This means that the value of your savings is falling.
Investing would give you the best chance of beating inflation. Some investment platforms allow you to open a stock and equity ISA and select a “conservative” level of risk that might be right for you. Find out what stocks and ISA stocks we value highly.
The rules for ISAs can be complicated, so it’s a good idea to check. Now you can start earning real money from your savings.