Should you consider a flexible ISA this tax year?

Given the heightened cost of living, should a flexible ISA be a top priority?

Nine out of ten adults have reported an increase in their cost of living over the last year. This is according to a recent survey published by the Office for National Statistics (ONS), and it’s easy to understand why.

While inflation has slowed from a 41-year high, it still sits in double digits. This is, in part, due to volatile fuel and food prices which have forced some consumers to become frugal with their spending.

Another study by the ONS reported that some have resorted to using credit to address the rising cost of goods and services.

“While loans can provide short-term financial security, the increased use of credit can pose longer-term challenges for households,” the ONS stated in its report.

Added to this, the Bank of England’s base rate has seen successive increases to combat inflationary pressures. While this generally increases the cost of borrowing it does make savings rates look more attractive.

A savings pot could be a better strategy to help you weather the increased cost of living and, with the end of the tax year in sight, making use of your annual ISA allowance could be important.  

In essence you can invest up to £20,000 into an ISA of your choice per tax year, with any returns sheltered from capital gains or income tax.

This means, given the variables at play, one consideration you’ll need to make is if you should opt for a flexible ISA.

A flexible ISA allows you to withdraw money from your account and replace it in the same tax year, without it affecting your annual £20,000 allowance.

For example, Jane invests her entire £20,000 ISA allowance into an easy access account. Within six months, she decides to withdraw £2,000 of this sum as a gift to her grandchildren.

If this was a flexible ISA, she would be able to reinvest this £2,000 sum into her easy access ISA in the same tax year.

This has repercussions for the future too. In this example, if Jane replaced her £2,000 contribution that tax year and added another £10,000 the next tax year her pot would stand at £30,000. This means she can add a further £10,000 into an ISA of her choice that second year. However, if she chose to withdraw £15,000 from this account, she could then add up to £25,000 into that account for that tax year.

This is made up of the £10,000 outstanding allowance for the current tax year, and the £15,000 she’s withdrawn from previous years.

While any cash held in your stocks and shares ISA can be flexible, this may only be a significant variable over the long-term.

Most consumers choose to use their stocks and shares ISA as a home for long-term savings. This means you won’t necessarily make frequent withdrawals and replacements to your funds over a one-year period.

If, for example, you need to access your money after five years, then placing your money into a flexible ISA can give you peace of mind that you can replace your built-up allowance. Still, remember you’ll only have that tax year to replace what has been withdrawn.  

According to Moneyfacts data, there are currently 72 flexible cash ISAs on the market.

Based on a deposit of £10,000, at the time of writing, Furness BS offers the best rate among these offers for new customers. This is for its 45 day notice ISA which at 3.30% AER is the highest notice ISA rate on the market.

Minimum deposits start at £1,000, and you can access your funds instantly in exchange for a 45-day loss of interest penalty.

It is also worth noting that you can’t open or manage this offer digitally.

Otherwise, for a flexible easy access account, Paragon Bank offer the top rate of 3.10% AER. This is a joint market-leading ISA on the Moneyfactscompare charts, matching Yorkshire Building Society’s Limited Access ISA.

More information on the best ISA rates across the market can be found in our ISA roundup, which will now be updated daily as we head into the new tax year.

Meanwhile, other flexible ISAs can be found on our charts. Simply click “View Further Details” to view the flexible ISA status of any chosen account.