If you’re a pensioner looking for suitable investments or savings accounts, one of the options could be a Cash ISA. Cash ISAs have many benefits, but they also have several potential disadvantages specific to pensioners.
Here, we weigh up those pros and cons with pensioners’ specific needs.
What Exactly is a Cash ISA?
A Cash ISA is a financial product sold by banks and building societies. It is like a savings account that allows investors to save a certain amount of money each year. The Government sets the upper cap. The main distinguishing feature of a Cash ISA is that interest earned is not subject to income tax. UK citizens can open one Cash ISA a year.
Pros of Cash ISAs for Pensioners
No Upper Age Limit
Perhaps one of the most important pros of a Cash ISA to a pensioner is that they have no upper age limit. This means, regardless of how old you are, you can purchase a Cash ISA as a place to save any nest egg you may have.
Tax Free Interest
As alluded to above, the other significant advantage of a Cash ISA for a pensioner is that you will not have to pay income tax on any interest that you earn. This means that, depending on your income tax bracket, you can save between 20% to 40% in tax. Plus, you will not have to pay income tax on any past Cash ISAs that you have opened either.
Many pensioners will have a lump sum saved up after years of working. A Cash ISA allows you to invest a lump sum when you open your account. While you can keep paying into it until you have reached the ISA’s limit, if you invest the highest amount allowed from the beginning, you can immediately start earning the maximum amount of tax free interest.
Some investments can have a great deal of high risk attached to them, which is not suitable for pensioners. As a pensioner, you will naturally have a lower risk appetite given that your investment timeline is shorter and therefore far more sensitive to losses. Having your money saved in a low risk investment like a Cash ISA is therefore essential so that you do not lose any value in our assets.
An often unacknowledged benefit of Cash ISAs is that your spouse can inherit it, even if they have a Cash ISA opened already in their name. In the event of your death, your spouse can be given a one-off payment that equates to the same amount saved in your Cash ISA account.
Cons of Cash ISAs for Pensioners
Historically Low Interest Rates
A problem to a Cash ISA account that may put some pensioners off is that the interest rates offered are not often very high. It could be that this is suitable for you as you only need your nest egg to be stashed away in a tax-efficient place that offers steady growth - however low. However, some pensioners may be looking for investments that help them grow their nest egg materially to plug any shortfalls in their retirement budget. Nevertheless, the Cash ISA market is a broad one, so some will offer better rates than others.
No Tax Relief on Contributions
While your interest that you earn on your Cash ISA product is not subject to income tax, the contributions that you make into an ISA are. This is not the case with other products that pensioners may be interested in like SIPPs or private pensions.
Amount Is Limited
It won’t be an issue for everyone, but a potentially significant disadvantage of a Cash ISA is that the amount that can be invested is capped, limiting what you may want to save. Some pensioners may have the need for other investment vehicles therefore once their Cash ISA limit has been maxed out.
Allowance Can’t Be Carried Over
You can only open one Cash ISA a year, and you cannot carry forward any of your annual allowance. This means if you do not use up your cash ISA allowance in one year, then the amount you could have saved in such an account is lost.
Are Cash ISAs a Suitable Investment for Pensioners?
Due to their tax-efficient way of saving, Cash ISAs can be a good idea to invest lump sums - particularly for pensioners who no longer can depend on a salary coming in every month. The tax savings earned on the interest from a Cash ISA can add up to make a substantial difference.
Plus, while the headline interest amount offered on many Cash ISAs on the market at the moment may not be very high, when the tax savings are taken into account, a Cash ISA can sometimes match other forms of investments or savings accounts. Depending on your specific circumstances, it can, therefore, be a good idea to max out your Cash ISA allowance each year if possible.