It’s been five years since the Bank of England cut interest rates to 0.5%. The impact of that decision becomes more severe with each passing tax year. The times when savers could easily get more than 5% in a cash Isa are long gone; today, we count ourselves lucky to earn half that. So keeping an eye on the top deals and switching accounts as necessary is critical. Let’s take a look at how to make the best of a bad situation.
Three steps for a better rate
Firstly, do you need instant access to your money or can you lock it away? Isas with notice periods or fixed rates generally offer higher rates than instant-access ones, although the gap has fallen as overall rates have come down. Make sure you understand the penalties that apply if you withdraw money from these accounts inside the notice period, or before the fixed-rate period is up. Typically, you will lose some or all of the interest you’ve accrued. However, some products allow you to make a limited number of withdrawals without penalty, which can be a good compromise between instant access and higher rates.
With rates so low, the extra interest to be eked out by shopping around for this year’s Isa is limited. This makes it even more important to ensure that any existing Isa balances you have are also earning the best rate. Many banks offer good rates when you first take out an Isa, only to cut after a year or so when they hope you aren’t paying attention. Make sure you know what you’re earning on all your old accounts and consider transferring uncompetitive ones to a new provider. Remember that transferring your old cash Isas does not affect your allowance for the current year.
Also check whether you can access any special deals that pay more interest than the standard top-of-the-table ones. Some banks offer preferential rates to long-standing clients or those that hold another product with them. Small building societies that are only open to residents of a certain area may offer better deals than the high street names. And if you have a large Isa balance from previous years to transfer, you can usually find a slightly higher rate. While each deal will only apply to a limited number of people, it’s worth checking what might be relevant to you.
Do you need an Isa?
Savers have become used to thinking of Isas as the best home for their money, but one peculiarity of the current market is that basic and even higher-rate taxpayers can often earn more after-tax interest in comparable non-Isa accounts. For example, for instant-access deposits, the Lloyds Bank Vantage current account pays 3% interest on balances up to £5,000 (so long as the balance stays above £3,000 – lower rates apply otherwise). You have to pay in £1,000 a month, but this can simply be cycled in and out of the account. The Santander 123 current account pays 3% on balances up to £20,000 (and above £3,000). You need to pay in £500 a month and there’s a monthly fee of £2, but it also pays cashback on direct debits for many household bills.
Those planning to pay into an Isa gradually rather than depositing a single lump sum could also consider regular saver accounts, where you pay in a fixed amount each month. You usually need a current account with a given bank to access its regular saver, but there’s generally little to stop you opening one solely to do this. Good deals include 6% for one year with First Direct, 4% for one year with HSBC (6% for HSBC Advance or Premier customers) and 4% for one year from Norwich & Peterborough.
The main disadvantage of accounts like these is that you won’t fill this year’s Isa allowance. If Isa rates recover in the next few years, this could mean you trade off higher earnings today for lower long-term gains. All else being equal, we’d still suggest using up your Isa allowance each year – but if maximising your current interest is your priority, you could look into non-Isa alternatives.
Cash Isas at a glance – five of the best for…
|Instant access: Nationwide Easy Saver Isa
|1.6% variable||No restrictions on withdrawals. Open online or in branch. Does not allow transfers in|
|Easy access: Britannia Select Access Cash Isa 2
|1.5% variable||Allows two penalty-free withdrawals per year. Open in Co-op and Britannia branches. Allows transfers in|
|Fixed rate: Coventry BS Fixed Rate Isa 19
|2.75% fixed%||Fixed until 31 May 2017. No early withdrawals permitted, 120 days’ interest penalty on early closure. Open online, in branch, by phone or by post. Does not allow transfers in|
|Large balance: First Direct Cash Isa
|2%||Requires £40,000 to get 2%; lower rates on smaller balances. Requires First Direct current account. Withdrawals allowed. Open online, by post or by phone. Allows transfers in|
|Loyalty deal: Coventry BS Isa Reward
|2.5% variable||Open to clients who held a Coventry cash Isa at 4 February 2013. Open online or by phone. Allows transfers in|
• Isas make sense – so act quickly
• Funds Isas: How to pick the best platform for you
• Stocks & shares Isas: It pays to compare brokers
• Now you can pop Aim shares into your Isa too
• Adventurous investing: Spice up your Isa with exotic investments
• Sipps: Take control of your pension