Politics this week. Feel free to skip to the week’s best money and investing links!

I voted for Boris Johnson, to the horror of wiser friends.

Not for prime minister and deliverer-in-chief of a Brexit even he didn’t really believe in. By the time of the General Election his conniving was already enough for me to see even the unpalatable Jeremy Corbyn as an elder statesman by contrast.

Rather, for Mayor of London a few years previously.

I thought London would benefit from his charisma. The quotes from the Iliad made me feel smarter. I was bored by career politicians and their clichés designed not to inspire you but to have you mentally tick a box and move on without thinking.

And I was once in a room with him. He drew all eyes like a matinee idol.

All the more impressive given he plainly isn’t. Rather, like a sorrowful dog who keeps pissing on your carpet, Johnson’s entire demeanor seems a conspiracy of nature that’s been optimized for forgiveness.

You want to ruffle his hair. To sigh. Oh Boris!

An aunt of mine – a tribal Labour voter – even expressed pity as she watched an apparently now tragic Johnson finally get prised out of office this week, with all the grace of a limpet coming off a rock.

My relative had forgotten he’d won the position in his own coup – taking his shot after Theresa May had been slightly more honest about the realities of leaving the EU, and in doing so breaking the first rule of Brexit.

(Brexit rule #1: never tell the truth about Brexit.)

My aunt became angry again when she was reminded about the hypocritical parties in lockdown. And the lies afterwards.

Good riddance, she said.

Still – she had to be reminded.

It ain’t half hot mum

Once you see through it, Johnson’s charisma makes him dangerous.

The pull is still there – you can feel it needling you. But it’s more the villainous appeal of The Joker.

Long-time readers know I would never forgive him for his self-serving machinations around Brexit. For standing up and saying what he knew was nonsense to an electorate whipped up on conspiracies about experts, immigration, and alienation.

But it beggars belief that those who voted for him to supposedly ‘take back control’ can look at the post-Referendum years through anything other than their fingers.

Short of doomsday scenarios, it could hardly have gone worse. The trashing of our institutions. The purging of the Tory party. The daily fabrications. Britain threatening to renege on its international deals like a tinpot dictatorship.

Come back Brussels. All is forgiven.

That Johnson still has defenders shouldn’t be surprising, but I just can’t help it.

Do Leavers have some kind of Stockholm Syndrome?

I suppose if you are one of the few who only voted us out because you feared Britain would become a vassal state of a remote EU bureaucracy, then some melancholy feeling is understandable.

Johnson did take us out of the EU.

So if you looked at the long list of problems facing humanity and decided bogus edicts about bendy bananas from across the channel were the biggest threat to your grandchildren, you got what you wanted.

Everyone else should think again.

Monty Python’s Flying Circus

Some people – on both sides – are claiming that Johnson didn’t even really ‘Get Brexit Done’.

Not me.

Brexit was always a word cloud of contradictory aspirations.

No immigration. Skilled immigration.

Less regulation about working conditions. Higher wages for workers. 

New foreign trade opportunities for companies. Gummed-up trade with the EU. 

Singapore-on-the-Thames for the 21st Century. Factory Britain from the 19th.

Economic gains for the taking. Economic pain as the price worth paying.

You could make almost any change and call it Brexit – while pissing off a contingent who’d voted for some other version.

Certainly the Tories didn’t need to go Full Monty Brexit, although it was probably inevitable once Johnson had stuck the knife into both May and her slightly saner deal for his own ends.

Remember that staying in the Single Market and/or the Customs Union was once touted as a feature of some versions of Brexit, not a bug.

But political calculus and reconciling an impossible mandate meant Johnson and Co. went for a Hard Brexit – Irish absurdities and all.

Finally we left the EU.

So yes, Johnson got Brexit done.

Dad’s Army

True, even Brexit’s most ardent cheerleaders have yet to identify almost any commensurate benefits beyond (for them) the end to free movement.

Absolutely the independent trade deals we’ve done are inconsequential.

Of course Brexit has inflicted real and lasting damage to the UK economy – let alone its standing on the world stage.

But none of that is indicative of Brexit not getting done. On the contrary, it’s exactly what we should have expected.

I will concede that immigration into the UK has held up better post-Brexit than I feared it would, though the numbers are likely still muddled by the pandemic.

But that’s been the only positive surprise so far. (And given that a significant minority of Leave voters were motivated by immigration, they might feel differently about the uptick, anyway.)

I’m also aware that some Remainers thought Brexit would drive the UK economy off a cliff, which didn’t happen.

But you will look in vain for me predicting that.

Rather, I see Brexit as insidious because it drains vitality from our economy all over the place, like so many tics on a dog.

More trade friction here. Inward investment that goes elsewhere. A farmer ploughing his unpicked crops into a field. A student who doesn’t get an internship in Europe. Tedious border checks for anyone who works abroad.

A weaker pound and higher interest rates, risking stagflation.

Drip, drip, drip.

And all for what?

Most obviously: the loss of our right to live, work, and retire anywhere in a beautiful and rich continent among 450 million other human beings.

That those who voted this freedom away don’t care about it – and have given us nothing good in return – is most galling of all.

It’s a knockout

Indeed you’d hope that finally Leave voters would at least reassess their views about Brexit in light of the past few years.

Two of its chief enablers – Dominic Cummings and Boris Johnson – long ago turned on each other.

People who lied there would be £350m more a week for the NHS couldn’t even come clean about partying in a pandemic.

If I’d followed this lot into Brexit hoping for some phantasmagorical economic boon – let alone superior politics – I’d be absolutely steaming.

But the polls are less than conclusive.

How the government is handling the issue of Brexit in the UK

Nearly a third of Britons still think Brexit is being handled well. I guess for most of them it’s a case of ‘better out than in’ – however stinky the consequences.

But those who were on the fence or who believed there could be net economic benefits are welcome to change their minds.

I saw through Johnson and his nonsense. Others can still do the same – and reassess his toxic legacy of Brexit.

At least if Johnson was our Poundshop Trump, we’ve dodged the equivalent of the 6 January attacks.

Rishi Sunak and Sajid Javid deserve some thanks. Better late than never.

Democracy has many flaws but it has one supreme virtue, which is enabling a peaceful transition.

Similarly, my faint hope is the Conservative party will turn itself back into a party of the center again. It’s hard to recall that its Brexiteers were once a pretty ridiculous fringe faction that all-but blamed the EU for the rain in Manchester.

Can control be wrested away their fantasy politics? We’ll see.

As for Johnson, goodbye and good riddance indeed.

https://twitter.com/jondharvey/status/1545030371846361089?s=21&t=x0bHFF6JB01Y_BTedSROsg

House keeping: Errata and MIA subscribers

The email version of our article on the Best Cash ISAs on Tuesday featured a pretty annoying typo.

It should have stated that you can put £4,000 a year into a Lifetime ISA.

Huge apologies for any confusion caused. I’d sack the offending sub-editor but unfortunately it was me, and I have an article to write for next week so we’ll have to soldier on.

Also, a half-a-dozen readers have contacted me over the past couple of weeks to report that they’ve subscribed to get our posts as emails but, well, they are not getting our emails.

In all these cases they were in our system but marked as ‘bounced’.

When a reader reports their email is on the contrary alive and kicking, I can put them back onto the distribution list.

So if you’ve subscribed yet your email box is untroubled by us, you might be in this boat too.

Check your spam folder first (the ignominy!) and double-check you didn’t subscribe with another email address. After that, drop me a line via our Contact box (link top-right) stating the email address in question.

Have a great weekend everyone. The country is in a mess, but at least a window for change has opened.

[continue reading…]

This article looks at property vs shares from the perspective of the typical man or woman in the (overpriced) street. It does not argue buying a house right now is better than buying shares – or vice versa. But rather: why do people tend to feel they’ve done well buying their own property? Compared to their poor attempts at share investing?

Trying to weigh up the merits of property vs shares is a right of passage for anyone who gets into investing.

Most of us have limits on our capital and income. Even more so in our late 20s and 30s when – traditionally – buying your first home was a right of passage.

Of course, three decades of rampant house price growth have made that aspiration a fanciful dream for many young people.

This includes even those with above-average wages and few outgoings, unless they also get a cash windfall. (Typically a hefty contribution from their parents).

But isn’t the language telling? That we still routinely call property ownership a ‘dream’?

Despite our best efforts at Monevator, nobody talks about their dream of opening a shares ISA or contributing to a SIPP.

Everyone’s an estate agent

I used to have arguments all the time about the merits of property vs shares as an investment.

This was in my 20s and 30s. Before UK property became so expensive that it made the choice moot for so many. Before the minority of young people who could buy tended not to discuss it, much as if their family had made their money from porn.

A succession of girlfriends thought I was crazy not to buy my own home and told me so.

Some (probably rightly) concluded I had commitment issues. But others thought I was just crap with money.

The latter had a point, too.

We’d seen London house prices shoot up for years by then. Multiple friends who’d bought in the mid-to-late 1990s had earned astonishing multiples on the small deposits they’d put down.

By 2003 it was already common to have a work colleague – who earned the same as you – sitting on a chunky six-figures of housing equity. Most of it conjured out of the property boom in fewer than half-a-dozen years.

But I hadn’t bought. And I didn’t for many more years to come.

Instead, I stuck to the view that London property was over-priced by traditional metrics for all but a brief period after the financial crisis. (And in that moment no bank would give me the money to buy anyway.)

Even when I eventually bought my flat in 2018, I still thought London property was over-pricey.

More than anything though I just wanted to change the channel after literally decades of debate, sitting out the market, and seeing prices go up and up.

It’s no wonder that faith in property is almost irrationally strong. The most straightforward take has been well-rewarded.

I remember watching a BBC documentary on the Spanish real estate crash in 2012 with a living, breathing Spaniard.

After my friend had chortled her way through this tale of a property boom in Spain built on over-lending, over-construction, and over-confidence that prices would always go up, she said London was different because: “prices will always go up”.

Pass me the Rioja, I sighed.

Ten years on, she is still right.

Home ownership works well for most

Here’s what I wrote in 2012 when I first told this anecdote:

The truth is my friend will probably do fine, despite her sketchy knowledge of London’s booms and busts.

She’s going to buy her first flat soon, and if the price later falls, she’ll sit through it, and get on with life.

By contrast, I am an expert on London property prices.

Yet I managed to opt out of the entire boom and then failed to capitalise in the recent bust.

My friend’s first flat became her buy-to-let. While the rental income ticks in, she lives elsewhere in a home she bought a couple of years ago with her now-husband. For his part he brought a ton of 1990s-earned housing equity to the picture.

Their story is far from unusual. So why do houses seem to be a bombproof investment for most people?

One reason is that even after a slump, only recent purchasers are underwater. Most people buy and hold their own homes for many years or even decades.

This means that at any one time, most people you know – especially older family members – will be okay because they bought a long time ago.

The vast majority therefore only have good things to say about home ownership.

Contrast this resilience with how people talk about shares after even a brief downturn.

Property vs shares: real-life utility

Another semi-psychological reason why property usually appears to be a good investment is because a house that is worth, say, 20% less than you paid for it still does its job as a house.

In reality it was a poorly timed investment – it slumped in value.

But we tend not to think of our homes that way.

Very different to shares – especially direct stockpicking as opposed to index funds, which is arguably closer to buying a single (undiversified) home.

Almost everybody I know who has dabbled in stock picking soon swore off it. They lost money and wondered what the point was of trading numbers on a screen.

Those in funds – passive or active – have done much better. But you still rarely hear them singing the praises of the stock market.

In contrast, those who buy a home put up paintings, hold parties, maybe get a dog. They live and breathe their investment. You never see them go back to renting.

This again makes property a clear favourite for most people. Their attachment to their home means they would never entertain the case for renting versus buying.

Do shares get any more respect in 2022?

When I last looked at property vs shares in 2012, the stock market was just recovering from a massive crash.

The financial crisis had recently tanked the markets. That crash came fewer than ten years on from the dotcom crash, which had done similar damage via a remorseless multi-year bear market.

In fact the 1990s was the last time most UK share investors could remember getting rich.

No wonder people favoured property versus ‘punting’ on the stock market. No wonder the buy-to-let boom.

In 2022 though shouldn’t the situation be a bit different?

While property prices have marched on since 2012, stock markets have done even better. Shares soon shrugged off the Covid crash in 2020. And they went bananas after that.

The first six-months of this year has been hard, for sure. But the average UK passive investor still isn’t hurting too much. At least not if they’re invested in a global tracker fund, pumped up on currency-boosted gains.

And as I say, for the decade before all that portfolios soared.

You’d think as many people would now be giddy about getting into shares as property.

But I don’t get that sense at all.

What a difference a decade doesn’t make

The truth is it’s not just down to house prices versus share prices. Even when I last compared historical house price returns to shares in 2012, I found it was roughly a draw.

And I don’t think superior numbers for equities since then would change much.

It’s hard to compare these two investments fairly. Everything from taxes to financing to how much house you buy or what markets you track varies widely.

Nevertheless, I bet you know far more people who say they’ve done great owning their own home over the past 20-30 years compared to any who boast about their stock market prowess.

I suppose enthusiasm for investing did flare in lockdown, and went crazy in early 2021.

But that euphoria proved short-lived.

Indeed the whole rise and fall of making overnight riches on so-called meme stocks and cryptocoins is emblematic of why property wins out for most people, in practice. Even if it shouldn’t when you run the numbers.1

It all comes down to attitude.

Reasons why people invest better in property vs shares

Most of us treat our home purchases very differently to how we approach investing in shares. There are lessons in that for us as investors, as well as homeowners.

Here are ten reasons why property has been a better investment than shares for most people.

1. Owning a home is nearly always a long-term investment

When someone buys a house, they’re usually thinking they’ll live in it for years. They commit to being on the property ladder and paying down a mortgage for decades.

With shares, many people ask what will go up in price next week. Even those who pay lip service to the long-term can panic at the first sign of trouble.

2. We’re very choosy about what house we buy

I’ve seen many people put thousands of pounds into a company’s shares because of an article in Investor’s Chronicle, a new product they’ve seen at John Lewis, or even a tip from Twitter.

In contrast, people routinely burn through weekends and shoe leather visiting dozens of properties before finally plumping for one. That’s on top of countless hours researching via websites.

If only they took as much time on their investing knowledge.

3. We’re all experts in houses

Try this word association game:

• Funds – OCF, tracking error, CAGR, portfolio, asset allocation

• Shares – P/E, amortisation, dividend yield, volatility

• Property – Two bedrooms, kitchen, garden, rent

It’s easy to see which is the most accessible.

From our earliest memories, we live in houses, we see refurbishments being made, and we find our bedroom too small.

We understand property by the time we’re teenagers in a way that only young Warren Buffett understood business.

4. You can leverage up your property investment

Now we’re getting to the hard stuff!

A bank will lend you £400,000 to buy a house at an interest rate that even in normal times is just a smidgeon above inflation.

Indeed at the time of writing – with inflation at around 10% – the cost of a mortgage is effectively deeply negative in real terms.

Just try getting the same deal from HSBC to buy a high-yield share portfolio – despite the fact that the dividends would equally cover the repayments.

‘Leveraging up’ like this makes a massive difference.

• If I invest £50,000 into shares and the stock market doubles, I have £100,000 and have made £50,000.

• If you invest £50,000 into a £200,000 house and the price doubles, your house is worth £400,000 and you have made £200,000, after backing out the mortgage

Yes I know houses are more work and need maintenance, interest is a cost, and whatnot. The point still stands. Taking on debt usually multiplies the return from home ownership several times over.

Most of us don’t work at hedge funds. We will never get access to cheap debt to gear up our stock market investments like we can with property, even if it was advisable. (It isn’t!)

5. There are no margin calls on mortgages

I covered this in my article on borrowing to invest via a mortgage. The executive summary is that mortgages are about the only sane way of borrowing to invest.

Why? For one thing, the bank won’t make a margin call on your mortgage. This means that if you buy a house with a 20% deposit and the price falls 20%, the bank won’t ask you to find another £50,000.

That’s in sharp contrast to say a spreadbetting account, where you’d need to stump up more money or be forced to close out your investment.

And for another thing…

6. Your house’s price is not marked-to-market

Not only are there no margin calls with property – unless you have reason to remortgage, you don’t even need to know what your house is worth.

Compare that to shares. If you buy Tesco shares this morning, by lunchtime you’ll know if you’re in profit or not. By next Tuesday you might have been scared out of your investment, or else tempted to sell for a quick gain.

I’ve lost count of the friends who’ve told me after buying a house that they don’t care what happens to house prices next. But I believe they would care if a man turned up every afternoon to tell them exactly what their house was worth that day. (Let alone every second, as you get with shares).

Blissful ignorance leaves them free to ignore volatility in house prices. This makes it easier to hold onto their investment.

7. Property is illiquid

Illiquidity is just a fancy word for something being costly and time-consuming to trade. And property being illiquid is another way homeowners are forced to be better investors.

Think about it. As if not knowing – and not needing to know – the price of your home wasn’t enough, selling a house is a complete pain in the conveyance. It’s so stressful it’s compared to getting mugged, divorced, or being diagnosed with a life-threatening disease.

Even if you do know what your house might be worth after checking on Zoopla, you’re not going sell on a whim.

Again, compare that to shares.

It’s next Tuesday, and your Tesco shares are down 3%. You panic and press the sell button. Job done, and the loss is locked in.

The liquidity of shares is one of their most attractive qualities, but it’s a double-edged sword for most.

8. You can add value as a homeowner

I sometimes tried to encourage my dad to put his talents to work at weekends to make a bit of extra spending money, or to save more for a rainy day.

He told me that after 40 hours at the office, the last thing he wanted to think about come Friday night was more work.

Yet my dad thought nothing of spending 12 hours on Saturday doing various DIY jobs around the house.

It was all unpaid labour that kept his investment sweet. But he didn’t see it that way.

9. Owning and living in your own home is very tax efficient

The biggest tax break available in the UK is probably the fact you’re not liable for capital gains tax on your own home.

Many people don’t even realise they’re getting a tax break. They just accept it as obviously true and they say it’s anyway redundant (inevitable quote: “We’ve all got to live somewhere”) but in reality it’s a massive advantage.

If you buy a home while I instead rent and try to build a war chest, after 30 or 40 years I could easily be paying tax on my investments unless I’ve been careful and maxed out my ISA and SIPP contributions from the start.

Whereas your unrealised gains are all tax-free.

Should you downsize to a smaller property for retirement, the profit you realise is completely untaxed.

And there’s more!

You get a second tax benefit by living in your own home. As the property owner you’re effectively your own landlord, yet you don’t have to pay tax on the ‘earnings’ you generate from your tenant (yourself) whereas if you were renting your house to others, you would.

People get very confused about this concept. But trust me, this is what is going on when you buy your own home.

You are ‘consuming’ housing services. (The technical term is imputed rent).

10. Property is a real asset

As a real asset, property has the ability to rise in price with inflation. Anyone over 40 might have noticed how inflation to a large extent paid off their parents’ mortgage.

Shares have the ability to respond to inflation, too, but it’s a bumpier ride.

Besides the favoured investment of the masses is cash in the bank. And that’s about as useful in an inflationary environment as a bag of kippers with a hole in the bottom.

If the Baby Boomers hadn’t owned their homes throughout the inflationary 1970s and 1980s, they wouldn’t have the lion’s share of the country’s wealth today.

Houses versus shares: Final verdict

Anyone who has spent more than five minutes on Monevator knows I’m a committed equity investor.

My first love will always be the stock market.

Also, as I’ve acknowledge a couple of times above, there are plenty of caveats you need to make in a truly fair fight between houses and shares as investments.

So don’t take this post as a rallying cry to dump your shares for a bigger house and a second garage. Diversification is financially prudent in all things, except perhaps spouses (too expensive).

Buying your own home AND investing in shares for long-term financial freedom is the best route for most of us to take.

However it’s worth thinking about how well your grandfather might have done from the stock market if he’d been willing and able to:

• Save into it each and every month
• Do lots of research for the best investments before buying
• Ignore price fluctuations
• Hold on for the long-term because selling was a big hassle
• Leverage up 5-to-1
• Not calculate his gains for 25 years

Oh, and get all his returns tax-free…

Appendix: A perspective on property vs shares, ten years on

I updated this article in July 2022, roughly ten years after it was first published. A reader back then even asked me in the comments below to do so.

Precisely comparing the returns from property vs shares over this time would be another article, and this one is already extremely long. 

It would be complicated, too, due to the very real extra costs of buying and owning property vs shares, and conversely the varying boost from financing through a mortgage.

But as I said when this (controversial) piece was first published and I reiterated in my introduction today, this article was never about predicting future investment returns.

For the record, here’s a graph of UK houses since I wrote the piece in 2012:

Source: Financial Times

Very nice if you happened to own a home!

However a global tracker fund would be up even more. It would have more than doubled for a UK investor, with returns accelerated by the collapse in the pound since the Referendum days.

Set against that, as I say most home buyers’s returns would have been amplified by leverage from their mortgage.

Either way it’s pretty obvious that predictions of a house price collapse made in the comments in 2012 were wide of the mark.

On the contrary, yet another generation of British property buyers has done well from home owning.

Feel free to again tell us in the comments below why that’s finally about to change. Perhaps due to rising interest rates or lower immigration post-Brexit or whatever your pet theory is.

Been there, done that, got the T-shirt.

Snakes and property ladders

It’s certainly possible that – as with bonds in 2022 – the bell will at last toll for UK property prices after an eternity of false alarms.

Nothing can go up forever. Can it?

But as we all indeed must live somewhere – and if you rent you are effectively buying a property, only you’re doing so for your landlord who is probably making a profit – I expect that over the long-term buying today still won’t prove a bad move.

Even if the question of property vs shares has a different answer.

Time will tell!

See you in 2032.

1. That article compares paying off a mortgage to investing, which is not the same thing as property vs shares. It’s about financing choices. But it’s still maths worth doing! [↩]

A stocks and shares ISA is essentially just a normal investing account – with the huge boon that your returns are shielded from the taxman.

Investors therefore usually have nothing to lose by investing in shares within an ISA wrapper. Doing so puts a tax-repelling force field around your portfolio. Any downsides are trivial.

With cash savings, however, it’s a different story.

While a cash ISA is indeed just a tax-free savings account, it’s rare to find one that pays an interest rate as good as the market-leading savings accounts.

In other words, you can’t choose a savings account, and then expect to find the same account available as a cash ISA. For whatever reason, savings providers treat cash ISAs and standard savings accounts differently.

Because of this, deciding to stash your savings in a cash ISA comes at the cost of lower interest.

The Personal Savings Allowance has reduced the appeal of ISAs

While a low interest rate is one reason why savers may be inclined to look past cash ISAs these days, another is the advent of the Personal Savings Allowance.

Introduced in 2016 by then-Chancellor George Osborne, the Personal Savings Allowance means most savers no longer pay tax on savings interest earned through normal savings accounts.

Under the Allowance, basic-rate taxpayers can earn as much as £1,000 in savings interest per year without having to pay any tax on interest. Higher-rate taxpayers can earn up to £500.

Additional-rate taxpayers don’t get an allowance. They should still look to use cash ISAs.

Cash ISAs aren’t quite dead yet though

Despite cash ISA rates often being pale shadows of those on equivalent savings accounts – and the fact that the Personal Savings Allowance gives most of us a straightforward alternative to earning tax-free interest – there are reasons why some people may still wish to opt for a cash ISA.

I’ll run through those reasons in a moment.

But first, let’s look at the different kinds of cash ISAs available – and the best rates right now.

Note: £85,000 FSCS savings protection applies to all of the accounts I’ve listed below.

Easy access cash ISAs

With easy access cash ISAs, you can usually add or withdraw cash as often as you like. Because of this flexibility, easy access is the best ISA type to go for if you’ll need to use your money in the near future.

Interest rates are variable with easy access though, meaning the rate you’re paid can change at any time.

Here are the top easy access ISAs today:

• Highest easy access rate available, but withdrawals are limited. If you want to earn the highest interest rate on your cash, you’ll have a stretch the definition of ‘easy access’. That’s because while Paragon Bank pays a decent 1.35% AER variable interest, you only get this rate if you make three or fewer withdrawals per year. More and the rate drops to just 0.25%.
  
• Top rate with unlimited withdrawals. If you want the freedom to make as many withdrawals as you like, try Tesco Bank. It pays a slightly lower 1.32% AER variable.

Fixed rate cash ISAs

With fixed rate cash ISAs, you must lock your money away for a set period. Fixed periods typically last between one and five years.

Generally, the longer the fix, the higher the interest rate you can earn.

Because fixed accounts aren’t as flexible as easy access options, interest rates are often more generous.

Even so, interest rates on fixed rate cash ISAs typically lag those on normal fixed savings accounts.

However there is one huge difference between fixed rate cash ISAs and fixed rate savings accounts: when your money is stashed in a fixed rate cash ISA, you can access your cash before the term ends.

This is NOT the case with fixed savings accounts. There your money is truly locked away for the duration.

The reason you can withdraw cash early from a fixed rate ISA is a rule that requires providers to give ISA savers access to their funds at all times.

That said, if you do withdraw cash early from a fixed cash ISA you can expect to pay an interest penalty. This is usually a percentage of the amount you wish to take out of your account.

Here are the top fixed rate cash ISA deals right now:

• Top one-year rate. Virgin Money offers the highest one-year fixed rate cash ISA rate. Its account pays 2.06% AER fixed and matures 24 June 2023. If you withdraw cash early from this account you’ll pay a 60 days’ interest penalty.
  
• Highest three-year rate. If you wish to opt for a longer fix, then Paragon Bank leads the three-year Best Buy tables. Its account pays 2.55% AER fixed. However if you want to access your cash before the term ends, you’ll pay a hefty 270 days’ interest penalty.
  
• Highest five-year rate. Hampshire Trust Bank offers 2.6% AER fixed for five years. Withdraw cash early though, and you’ll pay a 365 days’ interest penalty.

Lifetime ISAs

If you’re aged 18-39, you can open open a Lifetime ISA.

Lifetime ISAs were launched in 2017 with the stated goal of helping more young people to invest.

Here’s a quick overview of how they work:

• You can put up to £4,000 per year into a Lifetime ISA.
• The Government pays a 25% bonus on anything you put in, up to your 50th birthday.
• You can use Lifetime ISA funds for a deposit towards your first home (as long as you’ve held your account for a year or more) or for retirement once you hit 60.
• If you wish to access your Lifetime ISA funds early, you have to pay a 25% penalty on the amount you want to take out.
• You can transfer a Help to Buy ISA into a Lifetime ISA if you choose. Alternatively, you can continue to add funds to your Help to Buy ISA until November 2029.

You can hold a Lifetime ISA in cash or in stocks and shares. But since I’m focusing on cash ISAs in this article, we’ll just look at those.

Here are the best cash Lifetime ISAs available right now.

• Highest Lifetime ISA rate, but there’s a monthly fee (and you must have an Apple device). The highest interest rate on Lifetime ISA is available from Nude. It offers savers a decent 1.25% AER variable, though it’s only available to open via its iOS mobile app. This means you’ll need to own an Apple device. Annoyingly, the account charges a £2 monthly fee, so do weigh up the cost.
  
• Highest rate, without a fee. If you’d rather avoid a monthly fee or the need to own an Apple device, then Skipton Building Society offers a Lifetime ISA paying 0.85% AER variable.

When is it worth considering a cash ISA?

While cash ISAs pay lower interest rates, there are still some circumstances where opening one might be the better option.

Consider opening a cash ISA if:

1. You’re an additional-rate taxpayer. If you earn over £150,000 per year then you don’t get a personal savings allowance. This means you have to pay tax on the interest you earn on your savings. However, this does not apply to cash savings held in an ISA. So if you’re a big earner, opening a cash ISA could be a wise, tax-efficient choice.
   
2. You’re likely to exceed your personal savings allowance. If you have lots of savings in cash, you may pay tax on some of your interest. The Personal Savings Allowance is pretty generous for most people, but the income can soon become taxable if you have a few tens of thousands of pounds in cash savings. How soon depends on the total saved and your tax bracket.
   
   For example, if you’re a higher-rate taxpayer (with a £500 allowance), you only need roughly £34,000 in an easy access savings account that’s paying 1.5% to earn enough interest to exceed your allowance. A basic-rate payer could put away just over £66,000 before facing the same problem. In either case, moving some of that money into a cash ISA before you hit the limit could be wise, even if you’ll get a lower interest rate. Do the maths!
   
3. You don’t really want to lock away cash. I’ve covered this already. Fixed cash ISAs don’t require you to lock away cash for good. When you put your cash into a fixed ISA, you essentially have a ‘get out of jail free’ card enabling you to access your cash early (though you’ll usually pay an interest penalty).
   
   This is not the case with non-ISA fixed savings accounts. So if you value – or need – the option to access your cash in an emergency but you’re fed up with miserly rates on standard easy access savings accounts, a fixed rate cash ISA could be a smart decision.
   
4. You’re a would-be first-time buyer. If you’re under 40, a non-homeowner, and likely to buy your first home in over a year, then you should probably consider opening a Lifetime ISA. No other financial product available offers a 25% bonus like the Lifetime ISA does.
   
   Of course, whether it’s best to open a cash Lifetime ISA or a stocks and shares version is something else to think about.

Don’t forget the annual the ISA allowance

Regardless of the type of cash ISA you go for, be mindful of the annual ISA allowance. This mandates the maximum amount you can put into any type of ISA within a given tax year.

For 2022/23, the ISA allowance is £20,000.

Happy rate hunting!

Have you opened or contributed to a cash ISA this year? Or do you believe that cash ISAs have had their day? I’ve love to read your thoughts in the comments below.