Now that the new tax year has begun, you may be thinking about what to do with your savings.
Stocks and shares of Isas are a great way to protect your investments from taxes on interest, profits and dividends.
But given the ongoing stock market turbulence, you might be cautious or unsure where to invest your money, and instead choose to keep your contributions in cash for now.
We take a look at what happens to your uninvested cash and which of the most popular investment platforms offer the best rates.
You are unlikely to keep cash in an Isa for the long term, but you probably won’t make as much profit as investing
Is it a good idea to keep cash in your stocks and shares of Isa?
Most platforms tend to pay some sort of interest on cash held in stocks and shares of Isa. This varies from platform to platform and can also depend on how much cash you hold.
You should not expect too much interest and it will certainly be less than if you had cash in a bank or mortgage savings account.
After years of low interest rates, interest rates on savings accounts have now reached their highest level in more than a decade.
The best easy-access savings accounts now offer more than 3 percent interest, the highest since September 2012, while term accounts pay more than 4.6 percent.
However, it can have tax consequences, because it becomes a lot easier to break the personal allowance.
That’s why opting for the tax-free packaging of an Isa will help you build your savings – although you should keep in mind that cash Isa savings rates are usually lower than standard savings rates for this reason.
> Read our essential guide to Isas
A share of Isa is a great way to build your savings, as higher inflation erodes the value of your savings. In the long run, cash returns have lagged the stock market.
If you’re concerned about stock market volatility, keep in mind that there’s never a “right” time to start investing – it’s one of the biggest myths when it comes to investing.
Timing the market is almost impossible, so waiting for the perfect moment means missing out on profits.
Stocks and shares of Isas offer the potential for investment returns, but many also pay a small amount of interest on money held in cash
Which platforms pay interest on uninvested money?
This week, Saxo announced it had introduced a new interest rate model that allows clients to earn interest on their uninvested cash.
The rate paid is updated daily based on the Sterling Overnight Interbank Average Rate (Sonia) benchmark, meaning it reflects any changes to central bank policy.
So if the Bank of England raises its interest rate, Saxo clients will also see their deposit rates rise.
Crucially, there is no lock-in period or upper limit on the amount paid, and customers can also earn interest on all deposits in British Pounds, Euros and US Dollars.
Hargreaves Lansdown customers can earn 2 per cent on a Hargreaves Lansdown Isa, Junior Isa or Lifetime Isa if the account balance is £100,000 or more.
This drops to 1.5 per cent for accounts between £50,000 and £99,999.99 and 1.25 per cent for balances between £10,000 and £49,999.99. Customers with a balance of up to £9,999.99 receive 1 percent interest.
Cash in a fund and equity account will earn 1.6 per cent gross interest on an account balance in excess of £100,000, falling by 20 basis points per tier, with an account balance worth up to £9,999.99 paying 1 per cent interest.
Elsewhere, Bestinvest pays a 3.1 percent interest rate on all cash balances.
While interest on Isas, Junior Isas and Sipps is paid free of UK income tax, interest on other accounts is paid gross. This means that you must pay the tax due on the interest that exceeds the tax-free allowance.
Vanguard, popular among investors for its LifeStrategy funds, currently pays 2.2 percent interest on cash in an Isa, though this is a managed rate and subject to change.
Customers using the DIY investment platform Freetrade can earn 3 per cent on uninvested money when they pay for the Plus plan, which costs £9.99 per month.
Moneyfarm, which recently partnered with eToro to offer shares and shares of Isa, does not offer interest on cash held, and neither does Interactive Investor.
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