Submitted by Bill Fernie
29th August 2026
There is a financial habit that many pensioners have developed over the years which is perfectly understandable: keep some money in the bank, earn a bit of interest and leave it alone.
For people who have spent a lifetime saving, the attraction is obvious. There is no investment risk, the money is accessible and the interest provides a useful addition to pension income.
But there is a question that some pensioners should perhaps be asking themselves: is all that interest really tax-free?
The answer is not necessarily.
And with changes to the taxation of savings income coming in 2027, this is a good time to look at whether some savings sitting in ordinary bank or building society accounts could be better placed inside a Cash ISA.
This isn't about taking investment risks. A Cash ISA is still cash. The attraction is that the interest earned within it is free of Income Tax.
The taxman doesn't ignore savings interest
There is a widespread impression that if you are retired and living mainly on a pension, the interest from your savings is somehow automatically tax-free.
It isn't.
Interest from ordinary bank and building society accounts is taxable income, although there are allowances which mean many people don't actually pay tax on it.
For the 2026/27 tax year, a basic-rate taxpayer can receive up to £1,000 of savings interest without paying tax under the Personal Savings Allowance. For a higher-rate taxpayer the allowance is £500, while people with additional-rate income do not receive the Personal Savings Allowance.
There is also a starting rate for savings which can provide up to £5,000 of savings income at 0% for people with sufficiently low non-savings income.
So a pensioner with a modest pension and a modest amount of savings may quite legitimately pay no tax on their bank interest.
But that doesn't mean that everybody with savings is in the same position.
It can become surprisingly easy to cross the line
Imagine somebody has £50,000 in ordinary savings and is receiving 4% interest.
That produces £2,000 a year.
A basic-rate taxpayer has a £1,000 Personal Savings Allowance, so potentially £1,000 of the interest could fall outside the allowance and become taxable.
At a 20% rate that would be £200 of tax.
Now imagine the person has £100,000 earning 4%.
The interest is £4,000.
Even after the £1,000 Personal Savings Allowance, there could be £3,000 of taxable savings income for a basic-rate taxpayer.
At 20%, that could mean £600 of tax.
These are deliberately simple examples. A person's actual tax position depends on their total income and circumstances, and Scottish taxpayers have different rates on non-savings income, although savings interest itself is taxed at the UK-wide savings rates.
The point is not that everybody with £50,000 or £100,000 in the bank will pay those amounts.
The point is that the more savings you have, the more important it becomes to understand what is happening to the interest.
A Cash ISA changes the equation
This is where a Cash ISA can become useful.
Interest earned inside a Cash ISA is tax-free.
So if £20,000 is placed in a Cash ISA paying 4%, that produces £800 of interest without creating a tax liability.
If the same £20,000 remains in an ordinary savings account, the £800 becomes part of the person's savings income and has to be considered alongside their Personal Savings Allowance and other taxable income.
The difference may not seem enormous in one year.
But people often have savings for many years.
And interest rates can change.
Savings can grow.
Pensions can increase.
Other income can change.
What was completely tax-free five years ago may not remain tax-free forever.
Pensioners have a particularly interesting opportunity
There is an important change coming in April 2027 which many people may have missed.
The Government is reducing the annual Cash ISA limit to £12,000 for people under 65, within the overall £20,000 ISA allowance.
But people aged 65 and over will continue to be able to put up to £20,000 a year into Cash ISAs.
That is significant.
The very people who may have accumulated substantial savings over their working lives are not losing the ability to shelter up to £20,000 of cash savings each year.
A pensioner with £60,000 sitting in ordinary savings could, subject to the ISA rules and available allowance, gradually move money into a Cash ISA rather than leaving the whole amount exposed to tax on interest.
A couple could potentially use two separate ISA allowances, although each person's allowance belongs to them and cannot simply be transferred between spouses.
But don't rush to move everything
There is an important warning here.
A Cash ISA isn't automatically the best home for every pound.
A pensioner may need an emergency fund which can be accessed instantly. They may have a large bill coming up, a car to replace, house repairs to pay for or simply want the comfort of having readily available cash.
Some Cash ISAs are easy access. Others are fixed-term and may impose restrictions or penalties for withdrawing money.
And some ordinary savings accounts may actually offer a better interest rate than a particular Cash ISA.
So the sensible approach isn't:
"I'm a pensioner, therefore I should put all my savings into a Cash ISA."
It is:
"How much interest am I earning, how much tax could I be paying on it, and is there a better place for some of my savings?"
That is a much more useful question.
The coming tax change makes this more important
There is another reason to look at the figures now rather than waiting.
From April 2027, the Government plans to increase the UK-wide Income Tax rates applying to savings income to 22% for the basic rate, 42% for the higher rate and 47% for the additional rate. The Personal Savings Allowance is currently being retained.
For somebody with a substantial amount of taxable savings interest, that could make the difference between an ordinary savings account and a tax-free Cash ISA more significant.
It is worth remembering that these rates apply specifically to savings income. Scotland has its own Income Tax bands for non-savings income such as pensions, but savings interest remains subject to the UK-wide savings rates.
That distinction can be confusing.
A Scottish pensioner could therefore be paying Scottish Income Tax on their pension while paying UK savings-income tax on some of their bank interest.
Don't forget the £20,000 limit
There is another misconception worth clearing up.
You cannot simply take £100,000 from a bank account and put it all into a Cash ISA in one go.
The annual ISA allowance is currently £20,000, although the rules allow different types of ISA to be used within the overall allowance.
This means that somebody with substantial savings may need to think ahead.
For a pensioner aged 65 or over, the planned rules from April 2027 mean that up to £20,000 can continue to be placed into a Cash ISA each tax year.
Over several years that can gradually move a significant amount of savings into a tax-free environment.
There is another reason to be careful
There is a temptation to think that because interest rates are relatively high compared with the past, savers should simply leave everything where it is.
But interest rates are not the only thing that matters.
The real return is what remains after tax and inflation.
A savings account paying 4% doesn't really give you 4% to spend if some of the interest is taxed.
And if inflation is running at a significant level, even tax-free interest may not completely protect the purchasing power of the capital.
This is why a pensioner's savings strategy should start with the purpose of the money.
Some money may be needed immediately.
Some might be needed within a year or two.
Some may be there simply as a reserve which hopefully won't be touched.
Those different pots don't necessarily need to be treated in exactly the same way.
Don't forget that ISAs are not just about avoiding today's tax
One of the attractions of an ISA is that it creates certainty.
If your savings are outside an ISA, you have to keep an eye on the Personal Savings Allowance and your total income.
If your pension increases, if you receive another source of income or if interest rates rise, your tax position can change.
Money inside a Cash ISA doesn't have that problem. The interest remains tax-free under the ISA rules.
For someone who expects to keep substantial cash savings for many years, that can be valuable.
It also means less paperwork and less need to calculate whether interest has taken you over an allowance.
So what should a pensioner actually do?
The first step isn't to open an ISA.
It is to get a piece of paper and write down all the savings accounts you have, how much is in each one and what interest rate each is paying.
Then work out approximately how much interest the accounts will generate over a full tax year.
Next, look at your total taxable income, including your State Pension and other pension income.
Then ask whether the interest is likely to exceed the allowances available to you.
If it doesn't, there may be little immediate tax benefit from moving the money.
If it does, a Cash ISA could be worth considering.
And even if there is no tax to pay today, it may still be worth using some of your ISA allowance if you expect your savings or interest income to remain substantial.
The important thing is not to be frightened of the word "ISA"
For some older people, the word ISA sounds like something associated with investments and the stock market.
A Cash ISA is different.
You don't have to buy shares.
You don't have to accept stock-market fluctuations.
You are simply putting cash into a savings product which has a tax-free wrapper.
The money remains cash, subject to the particular account's terms and the protection arrangements applying to the provider.
That makes the Cash ISA a potentially useful tool for somebody whose priority is protecting savings rather than chasing investment returns.
A little bit of housekeeping could save real money
There is no guarantee that moving savings into a Cash ISA will save a particular pensioner money.
For someone with a small amount of savings and a modest income, the Personal Savings Allowance may already mean that all their interest is tax-free.
For somebody with larger savings, however, the calculation can be very different.
And with savings tax rates scheduled to rise in 2027, it is worth doing the calculation rather than assuming the taxman isn't interested in your bank account.
Perhaps the simplest message is this:
Don't move your savings just because somebody tells you an ISA is better.
But equally, don't leave substantial savings in ordinary accounts year after year without checking what the tax consequences are.
For a pensioner who has spent decades building up a financial cushion, the interest is part of the reward for saving.
There is nothing wrong with paying tax when tax is properly due.
But there is also nothing wrong with using the tax allowances Parliament has deliberately provided.
And in this case, a few minutes spent looking at the numbers could make the difference between keeping all of your savings interest and handing part of it back to HMRC.
The taxman may not come knocking at the door.
But that doesn't mean he isn't already keeping an eye on the interest.
Note
Bill Fernie is a pensioner who a long time ago worked for HMRC.