For the past decade, Individual Savings Accounts (Isas) have been plugged as the best place for your savings. But pathetic interest rates mean some experts are now warning that your money could earn you more in a standard account, even if you take account of the tax advantages. But is that really the case?
The savings rates on cash Isas are certainly woefully low. So low that “savers in cash Isas could be missing out on sorely needed income that they could receive through another product from their provider”, says Nina Montagu-Smith in The Daily Telegraph. Her argument is based on a review of fixed-rate cash Isas and fixed-rate bonds by Defaqto. And she’s got a point.
For example, if you were to save a minimum of £100 in Derbyshire Building Society’s two-year fixed-rate Isa, you would earn 3% a year. But, put £100 in the same building society’s two-year fixed-rate bond and you would receive 4.15% interest per year. Even after tax, that’s a return of 3.32% for a basic rate taxpayer.
The trouble is, this is only the case for medium to long-term savings bonds. Given the uncertain state of the economy at the moment – and the danger of interest rates or inflation rising – you may not be keen to lock up your money for that long. No one wants to be stuck with a low interest rate when rates start going up.
So if you aren’t prepared to tie up your savings for that long – and we’d be reluctant to do so – then Isas are still beating standard rates. But only just.
The best Isas
The best buy instant access cash Isa is currently offered by Standard Life with an interest rate of 2.65%. Whereas the best buy standard instant access account is the No Notice Saver Direct from West Bromwich Building Society offering 2.80% interest. That falls to 2.24% after tax for a basic rate taxpayer, or 1.68% if you are a higher rate taxpayer. So – unless you’re a non-taxpayer – the Isa wins.
What about if you’re happy to lock up your money for a shorter period of time? Well, the best interest rate available at present on a one-year fixed-rate Isa is 3% from either Mansfield Building Society or Cheshire Building Society. That’s on the basis that you are looking to invest just one year’s Isa limit of £3,600, rather than transferring a larger amount.
The best standard fixed-rate one-year bond is Northern Rock’s Fixed Rate Bond Issue 366 which pays 3.6%. That’s 2.88% after tax for a basic-rate taxpayer, so again, the Isa wins here.
However, you don’t need to lock up your money for a year. In fact, it’s a daft idea to do so. As long as you are prepared to give 45 days’ notice before withdrawing your cash, the best Isa available is Manchester Building Society’s Premier ISA 45 Issue. This pays 3.26% interest. The best interest rate you can get on a standard notice account is 3.15% from Nottingham Building Society’s Postal Access 50.
Transfer your Isa if you’re not getting the best cash rate
So at present there are still plenty of Isas that can beat standard accounts. And even if this changes it would have to be a really large discrepancy before it would be worth moving your money out of Isas. One problem is that if you take your money out of an Isa, you can’t put it back in. So if you have already used this year’s £3,600 cash Isa allowance and you then take £3,000 out to put it into a better paying standard account, you can’t put £3,000 back into an Isa at a later date.
So sit tight, or transfer your Isa if you can get a better cash Isa rate elsewhere – such as the Manchester Building Society account mentioned above. But remember to make it clear to your provider that you want to transfer your money to another Isa. If your money is withdrawn rather than transferred, you lose your tax benefits.
• This article is taken from our weekly MoneyWeek Saver email.
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