More than £53 billion held in fixed-rate cash ISAs will mature by April - where should savers move their money?

About £53.9 billion of ISA cash savings held in fixed-term accounts is due to mature by the end of April.

This means those looking for the best rates on ISAs may find themselves left with a poor rate of return on their cash.

Analysis by the consultancy CACI and Paragon Bank reveals that most of the savings (£36.4 billion) maturing between now and April have a term of up to one year.

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A further £15 billion is held within cash ISAs that have a term of between 18 months and two years.

Last year was one of the busiest cash ISA seasons on record as savers looked to shield their savings interest from the taxman. Savers pumped in £36.3 billion from the start of April to the end of November, according to the latest official figures.

CACI, which compiles the savings deposits of 40 leading providers of cash savings, says the growth of ISA balances outpaced non-ISA savings accounts last year.

Some people rushed to open or top up a cash ISA last autumn in the lead-up to Labour’s first Budget, as speculation mounted that the popular tax-efficient accounts could be targeted in chancellor Rachel Reeves’s tax raid.

In the end, nothing was announced, and savers can still squirrel away up to £20,000 across cash ISAs and stocks and shares ISAs each tax year.

If your cash ISA is maturing soon, we look at your options: should you pick another fixed-rate ISA, where to find the best interest rate, and why you need to consider inflation as well as tax.

Consider what you want from your savings

If you think you’ll need to access your money within a few months of your cash ISA maturing, you should park the money in an easy-access savings account. This could be another cash ISA, a traditional savings account or even a high-interest current account.

If you’re happy to lock up your money for longer, in exchange for a better interest rate, you can look again at a fixed-rate account.

How long you “fix” your savings for depends on how long you’re prepared to lock your cash away for, and what you think will happen to interest rates.

Today the top one-year cash ISA is paying 4.53%, while the top five-year ISA is paying 4.20%. The gap between the two accounts has narrowed over the past year: in January 2024, the best one-year ISA offered 5.01%, whilst the top five-year cash ISA paid 4.30%.

Anna Bowes, savings expert at The Private Office, a financial planning firm, tells MoneyWeek that the gap between the short term and long-term top cash ISAs has narrowed from 0.71% to just 0.33%, “making it more palatable to consider putting some cash away for longer”.

Tax on savings

Cash ISAs are brilliant because they shield all your money from the taxman and you get to keep all the interest you earn. In contrast, the interest in a non-ISA savings account is subject to tax.

If you’re confident you won’t be liable for any tax, choosing another cash ISA may not be the best choice. It’s worth looking across the whole savings spectrum for the best interest rate instead.

For example, at the moment, the best one-year fixed-rate savings account is from Vida Savings, at 4.77%. This is higher than the best one-year cash ISA on the market, at 4.53% from Castle Trust Bank.

As a reminder, basic-rate taxpayers can earn up to £1,000 of interest income tax-free thanks to the Personal Savings Allowance (PSA). Higher-rate taxpayers have a lower limit of £500, while additional-rate taxpayers don’t have a PSA.

Derek Sprawling, savings managing director at Paragon Bank, comments: “With income tax thresholds frozen until the 2027/28 tax year, increasing numbers of people have become higher-rate taxpayers, meaning their PSA is halved overnight. If you are expecting an increase in your income that may push you into a higher tax band, then an ISA could be a sensible option to shield your savings interest from tax.”

According to Bowes, even if a non-cash ISA pays a higher interest rate, once you factor tax in, the cash ISA could pay you a better net return.

Say you deducted basic-rate tax from the top one-year bond paying 4.77%; the net rate then becomes 3.82%. In the meantime, the top one-year cash ISA is paying 4.53% tax free. “So, on £20,000 you would take home £764 from the bond, but £906 from the ISA. And this is why cash ISAs have become so popular once again,” says Bowes.

Act fast to get the best rates

If you want to open another cash ISA, make sure you pay attention to the various rules. One of the most important is the £20,000 ISA allowance. This is spread across all your ISAs, including lifetime ISAs and stocks and shares ISAs, and runs from 6 April to 5 April. In a nutshell, you mustn’t pay in more than £20,000 each tax year.

Any unused allowance in the tax year will be lost as unused allowance cannot be rolled over into the next tax period. In other words, it’s use it or lose it. If your cash ISA matures before 5 April this year, you may want to act fast and open a new ISA and contribute any remaining ISA allowance before the new tax year starts.

According to Sprawling, you should also act early as the run-up to the end of the tax year (so-called ISA season) is extremely busy for savings providers, with high volumes of account openings and transfer requests.

“To better handle the high volumes, savings providers can take popular products off the market or make certain products available only to existing customers. Therefore, if savers are thinking of opening a new ISA this tax year or transferring an existing ISA balance to a new account, don’t leave it too late,” he advises.

Impact of inflation on savings

You may be disappointed to find that if your one-year cash ISA is about to mature, the interest rates available today are likely to be a little lower than what you were earning.

But if inflation continues to be low, the real returns are likely to be very similar, says Bowes.

She explains that in January 2024 the top one-year ISA was paying 5.01% but inflation stood at 4% and has been on average 2.66% over the last 12 months. On a deposit of £20,000, after 12 months although the total balance including accrued interest would be £21,002, “the real value after the effect of 2.66% inflation would be £20,458, importantly still keeping up with the cost of living.

“However, today, although the best one-year ISA is 4.53%, if inflation is close to 2% for the next 12 months, whilst the total balance including interest would be £20,906 in a year’s time, the real return would be £20,496, actually slightly better.”

She adds: “This illustrates the importance of shopping around for the best rates, to put as many pounds in your pocket as possible, especially while the rates pay more than inflation. Make hay while the sun shines!”