Cash ISAs have been subject to much myth in recent years. From being inflexible to overly complicated, we challenge some of the most common misunderstandings surrounding the tax-free savings vehicle.

There’s no point saving into a cash ISA as the returns on non-ISA accounts are better

The rates offered on non-ISA accounts are typically a little higher to reflect the extra costs associated with administering ISAs, plus some extra flexibility ISA providers must offer on fixed-rate variants.

However, that doesn’t mean ISAs should be discounted, particularly if you are likely to pay tax on your savings, or reasonably expect to do so in the future.

As rates have gone up, the balance required to breach an individual’s Personal Savings Allowance (PSA) has reduced, so ISAs are attractive for those who have large balances or are higher or additional rate taxpayers.

For example, a higher-rate taxpayer with £15,000 in a one-year fixed-rate account paying 4.65% per annum would generate £697.50 interest during the year but would have to pay 40% tax on the £197.50 balance above their £500 PSA threshold, leaving a total return of £618.50 - equivalent to a 4.12% interest rate.

Any ISA paying over 4.12% would therefore result in a higher return and protect that money from tax in the future.

Transferring an ISA is complicated

Transferring an ISA is a simple process. At Paragon, it’s just three simple steps:

• Open your Paragon ISA.
• Tell us during your application you want to transfer your existing ISA savings and we’ll take care of the rest. Or, you can arrange an ISA transfer after your Paragon ISA is open.
• If your existing provider allows electronic ISA transfers, we’ll get in touch with them and request a transfer. If not, we’ll ask you to send us a transfer form. When we receive your completed form, we’ll get in touch with your current provider and arrange for your ISA savings to be transferred to your Paragon ISA.

Once you’ve chosen an ISA, you’re stuck with it

The only thing you are stuck with is the tax-free wrapper benefit.

You can move your ISA balances to new providers or even switch between cash and stocks and shares ISAs. Savers looking to move their ISA need to ensure that the provider they want to move to accepts transfers and that they won’t be charged a penalty or suffer any other detriment. 

If you want to transfer the money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money invested in previous tax years, you can choose to transfer all or part of your savings.

If you withdraw money from your ISA, you can’t put it back in

Flexible ISAs were introduced in 2016, allowing savers to reinvest any money withdrawn from an ISA wrapper provided they do so in the same tax year.

ISA savers can put away £20,000 each tax year. If a saver was at their £20,000 limit and withdrew £5,000 from an ISA to pay for some work on their house, for example, they would be able to add that £5,000 back later, as long as it was during the same tax year.

Some ISA providers - including Paragon - offer this service, but not all, so it’s worth checking your provider’s policy.

You should be aware that the situation with fixed-rate ISAs is slightly different as savers can't withdraw and re-deposit to the same fixed-rate product. 

You can only save into one cash ISA per tax year

Some ISA providers, including Paragon, allow savers to split their ISA allowance between several accounts to enable them to maximise their returns. At Paragon, we call this our ISA Wallet.

For example, a saver may want to keep £5,000 in an ISA access account for a rainy day, have another £5,000 in a one-year fixed-rate ISA account and be happy to lock in the £10,000 remaining into a long-term five-year fixed-rate ISA account.

Our ISA Wallet gives savers the flexibility to select their ISAs to match their specific needs.

Visit our Savings Explained centre to learn more about cash ISAs.