Will a Cash ISA really help me save?

The Individual Savings Account (ISA) which was constructed to replace the earlier Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs), is, in fact, a great way to save money for retirement. The ISA is not meant to be or to replace a pension plan, but because of the flexible nature of the plan, it can serve as a favourable addition to a pension plan.

The main concern an investor should have for any fixed investment when determining real savings is if the interest rate for that fixed investment can outstrip inflation and raises in the cost of living. ISA rates are such that they are consistently higher than inflation, which leaves a real profit in the pocket of the investor, even over the long term.

The second consideration for an investor is to make sure that the interest rate that is advertised for an Individual Savings Account is the interest that is actually received. Taxes are the problem here; taxes are what weigh on interest rates over time. However, the Individual Savings Account also has the advantage of being a completely tax free product. There is no limit on when or how much money can be withdrawn, but savings that are left in the financial vehicle grow at a tax free rate, which makes the interest rate that an investor sees on the surface the true interest rate.

The Individual Savings Account also has other advantages, such as being able to draw money from it at a faster rate than a pension. This may at first seem a detriment to savings, but because of the annual limits placed on investors about how much money can be put into an Individual Savings Account, the money that is actually placed in the account has a greater chance of being truly expendable. Since it costs nothing to save in this account, while other accounts cost money to hold money in (as they are built on before tax income), for a smart investor, the Individual Savings Account would be the last account to draw on for funds needed at any particular time.

Also adding to the saving potential of the Individual Savings Account is the fact that dividends earned in the account are not taxed, and there are no hidden fees associated with the account, as there are with most investment grade accounts. It is also advantageous for those nearing retirement to hold, as it is not subject to the income tax allowance reduction.