Choosing an Easy Access savings accounts or fixed rate ISAs can make a difference to your inheritance.

Receiving a lump sum inheritance can be an opportunity to plan for your financial future. You may already have a good idea of how you’d like to invest or save your lump sum of money or still be researching options.

Whatever your current situation, choosing the right savings account to keep your money safe, secure and growing is an important step and this guide is here to walk you through them.

 

Easy Access savings vs fixed rate cash ISA for inheritance


What are the benefits they offer your lump sum inheritance?

Two of the most common options for UK savers are Easy Access savings accounts and fixed rate cash ISAs – both offer benefits which can work well for your financial goals. But which is the right choice for you?

What this guide will cover

  • Easy Access savings vs cash ISA for inheritance: the benefits they offer your lump sum inheritance
  • Benefits of putting a lump sum into a cash ISA and a Easy Access savings account
  • Other options: should you consider Fixed Rate Bonds?
  • Some of the common mistakes to avoid when saving an inheritance
  • Comparing interest rates, tax benefits, deposit limits and access to funds

Understanding your options

Two of the most common options for UK savers are Easy Access savings accounts and fixed rate cash ISAs – both offer benefits which can work well for your financial goals. But which is the right choice for you?

Key features of Easy Access savings accounts

  • Flexible access to your money any time – withdraw and deposit cash anytime you need, no penalties or hidden fees
  • Ability to open multiple savings accounts for different savings goals
  • Competitive variable interest rate – so your money is always growing
  • Open and fully manage your account online

Key features of Cash ISAs

  • Earn interest tax-free up to the annual ISA allowance – which is currently £20,000
  • Flexible fixed terms- with Hodge you can choose a 1, 2, 3, or 5 year term
  • Get a guaranteed interest rate when you apply
  • Open and fully manage your account online

Key differences between Easy Access savings accounts and cash ISAs

The key differences between these two savings accounts are the accessibility vs. tax-free earnings. If you want flexibility and easy access to your money, then an Easy Access savings account could offer you what you’re looking for. If you value the tax-free benefits that ISAs offer, then these could be the right choice for you. If it’s not clear cut for you, the good news is, you could choose both. Putting some cash in an Easy Access savings account, ready and accessible for when you need it, and the rest in a fixed rate or cash ISA – locking it away while it earns interest tax-free.

Whatever the option you choose, for efficient investing, it’s usually best to consider a savings account rather than leave your money in a current account which can pay low rates of interest.

 

FSCS Protection – keeping your inheritance safe

We pride ourselves on being a trusted bank, keeping your money safe and secure until you need it. As a UK-regulated financial service provider, we are protected under the Financial Services Compensation Scheme (FSCS). This means up to £85,000 per person, per institution is safeguarded up this limit in the unlikely event of a bank failure.

Tax considerations and the ISA allowance

It’s very rare you find someone who is excited to talk about tax, but it can make a difference in turning your pennies into pounds if you understand some of the basics – especially when considering what to do with a lump sum.

Understanding how savings are taxed can help you make the most out of your inheritance. Whether you choose and Easy Access savings account, a cash ISA or a mix of both tax rules may affect your returns.

Does an ISA have a tax advantage?

ISAs offer a clear tax benefit. The current ISA allowance is £20,000 per tax year. This means you can deposit up to £20,000, per tax year, in one, or across multiple ISAs, and the interest earned on the amount will be completely tax-free. What’s more, once inside the ISA the money stays tax-free, regardless of how much interest it earns. So yes, it’s well worth considering an ISA as a good savings option to consider if you have a lump sum and want to shelter it from tax.

ISAs don’t count towards your Personal Savings Allowance (PSA) either, meaning you can still take advantage of these tax-free benefits if you’re a Basic rate or Higher rate taxpayer.

Tax and the Personal Savings Allowance (PSA)

When managing an inheritance, it’s important to understand how savings interest is calculated in the UK. The Personal Savings Allowance is separate from the ISA allowance and allows you to earn interest on savings outside of the ISA without paying tax. The PSA applies to the interest you earn and not the amount you save.

The current allowance is below and is dependent on the taxpayer band you fall into:

  • Basic rate taxpayers (those paying 20% tax on their income) – can earn up to £1,000 in interest per tax year tax-free.
  • Higher rate taxpayers (those paying 40% tax on their income) – can earn up to £500 in interest per tax year tax-free.
  • Additional rate taxpayers (those paying 45% tax on their income) – do not have a PSA, all interest outside of an ISA is taxable.

Both the PSA and the ISA allowance resets every tax year (6 April – 5 April). This means that the tax-free interest limit will start fresh each year.

You can find out more about income tax rates and bands on the Gov.uk website.

Advice for UK inheritance tax rules

UK inheritance tax, often abbreviated to IHT, comes with its own set of tax rules. It applies if an estate exceeds £325,000 (or £500,000 of passing to direct descendants). Savings, including ISAs are included in the estates value for IHT for purposes – for example, ISAs can be passed to a spouse tax-free, but they still count towards your estate and may be subject to inheritance tax.

As IHT rules can be complex, it’s best to get advice from a professional financial adviser.

 

Best ways to manage a lump sum inheritance

There are various types of accounts you can consider for ISAs, such as stocks and shares ISA, lifetime ISA, innovative finance ISAs and junior ISAs. The type of ISA you choose will be unique to your situation – for example someone looking into pensions savings for their retirement vs someone wondering where to put lump sum of money, will need to consider the difference between ISAs, as well as other savings accounts, before they choose the best one for them.

Common inheritance mistakes to avoid

The best way to avoid inheritance tax planning mistakes is by seeking trusted financial advice. IHT planning can be confusing, leaving many potential pitfalls professional advice, tailored to your individual circumstances, can avoid. Professionals in IHT planning will ensure you are taking advantage of all available strategies to reduce your Inheritance tax liability.

  • Not understanding tax implications

    Tax can be complicated but being aware of the tax implications when you receive an inheritance can help you make better choices for your money. Factors including your current tax bracket, the size of your inheritance and if property is included in the inheritance, are some of the considerations when it comes to inheritance tax planning.

  • Not starting your IHT planning early enough

    A big mistake people who have inherited a lump sum is not starting their planning early enough. The earlier you start planning, the more time you'll have to out your tax-saving strategies into action and help ensure your money is being saved or invested the most tax-efficient way possible.

  • Ignoring the impact of inflation

    If the rate of inflation is exceeding the amount your interest rate is returning on your investment, you may lose money over time. You need to consider this before you place your funds in a fixed term account, such as an ISA or a lower interest paying account, even if accessible.

How to choose the right savings account for you

There are various types of accounts you can consider for ISAs, such as stocks and shares ISA, lifetime ISA, innovative finance ISAs and junior ISAs. The type of ISA you choose will be unique to your situation – for example someone looking into pensions savings for their retirement vs someone wondering where to put lump sum of money, will need to consider the difference between ISAs, as well as other savings accounts, before they choose the best one. At Hodge, we only offer fixed rate Cash ISAs.

How Hodge can help with your inheritance savings?

Choosing the right account for your inheritance is an important decision. Whether you choose Easy Access savings account, a fixed rate cash ISA, a mix of both or an alternative savings account, the key is to find the right balance between flexibility, tax efficiency and long-term growth.

We offer a range of saving accounts, including Easy Access savings accounts, cash ISAs and Fixed Rate Bonds. ITake a look at our savings accounts or contact us. 

You can find a financial adviser at unbiased.co.uk.

This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice.

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