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Time to give cash ISAs a miss?
To say this year’s ISA season has been a damp squib would be an understatement, at least if you’re looking to save in cash.
Far from the race to top the best buy tables that we’ve seen in the past, this year it’s been a race to the bottom. We’ve seen ISAs being closed, rates being cut and banks and building societies saving their best deals for existing customers.
At the same time, new current accounts paying decent interest rates continue to be launched. This week TSB has launched the Classic Plus account, paying 5% on up to £2,000. Meanwhile, Lloyds has opened Club Lloyds, paying 4% on balances of £4,000-£5,000.
Both require you to jump through some hoops, such as paying in a minimum amount each month (£500 and £1,500 respectively), but the returns are impressive, albeit they’re not tax free.
And that’s where ISAs do come into their own, along with the fact that you can transfer them in the future. That process is also about to become easier from July, where you can switch old cash ISAs to stocks & shares ISAs, and vice versa.
But, right now, with such low rates is it worth bothering with this year’s ISA allowance?
[First-timer's guide to stocks & shares ISAs]
Alternative places to put your cash
As well as the new current accounts mentioned above, Nationwide’s FlexDirect account pays 5% interest on balances up to £2,500 for the first 12 months. The only condition is you need to pay in at least £1,000 a month.
Meanwhile, Clydesdale Bank and Yorkshire Bank both offer the Current Account Direct, which pays 3.83% on balances up to £3,000 until the end of March 2015. Again, you need to deposit a minimum of £1,000 a month into the account.
If you don't want to move your money around, Santander’s 123 account pays 1% on balances over £1,000, 2% on balances over £2,000 and 3% on balances from £3,000 to £20,000. You need to pay in £500 a month, and set up at least two Direct Debits. There's also a £2 a month fee on the account but you can earn cashback on some of your direct debits for household bills.
And Bank of Scotland's Classic Account with Vantage pays 3% on balances of between £3,000 and £5,000 so long as you pay in £1,000 a month. You can have up to three accounts too.
Peer-to-peer websites allow you to lend money to other people and potentially earn a greater reward for your risk.
However, your interest isn’t tax free and your money isn’t protected by the Financial Services Compensation Scheme, which is where the risk comes in.
RateSetter’s five-year income account offers a rate of 5.70% over five years, with new entrant Lending Works offering 5.30% over the same time period. Meanwhile, Zopa is currently guaranteeing a rate of 5% over five years after fees.
You could also look at the likes of: Funding Circle, which only lends to businesses; short-term lending via pan-European lender TrustBuddy; commercial property lender Relendex; and Wellesley & Co, which offers bridging and development loans secured on property.
[Everyday ways to save over £700 a year]
How they compare
So let's take a look at how the different options really stack up against one another.
Account | Type | Gross interest rate | Net interest rate for basic rate taxpayer | Net interest rate for higher rate taxpayer | Minimum deposit |
Five-year peer-to-peer savings | 5.70% | 4.56% | 3.42% | £20 | |
Five-year peer-to-peer savings | 5.30% | 4.24% | 3.18% | £10 | |
Current account | 5.00% (one year only) | 4.00% | 3.00% | £1 (max: £2,500) | |
Current account | 5.00% | 4.00% | 3.00% | £1 (max: £2,000) | |
Five-year peer-to-peer savings | 5.00% (guaranteed rate) | 4.00% | 3.00% | £10 | |
Lloyds Club Lloyds | Current account | 4.00% | 3.20% | 2.40% | £4,000 (max: £5,000) |
Clydesdale Bank Current Account Direct | Current account | 3.83% (until March 2015) | 3.06% | 2.30% | £1 (max: £3,000) |
Yorkshire Bank Current Account Direct | Current account | 3.83% (until March 2015) | 3.06% | 2.30% | £1 (max: £3,000) |
Skipton BS Fixed Rate ISA | Five-year fixed rate Cash ISA | 3.00% | 3.00% | 3.00% | £500 |
Current account | 3.00% | 2.40% | 1.80% | £3,000 (max: £20,000) | |
Bank of Scotland Classic Account with Vantage | Current account | 3.00% | 2.40% | 1.80% | £3,000 (max: £5,000) |
Coventry BS Fixed Rate ISA | Three-and-a-half-year fixed rate Cash ISA | 2.75% | 2.75% | 2.75% | £5,760 |
Nationwide Fixed Rate ISA | Three-year fixed rate Cash ISA | 2.25% | 2.25% | 2.25% | £1 |
Nationwide Fixed Rate ISA | Two-year fixed rate Cash ISA | 2.05% | 2.05% | 2.05% | £500 |
Halifax ISA Saver Fixed | 18-month fixed rate Cash ISA | 2.00% | 2.00% | 2.00% | £500 |
Islamic Bank of Britain Sharia-Compliant 120-Day Notice ISA** | Notice ISA | 1.81% | 1.81% | 1.81% | £250 |
Metro Bank Fixed Rate ISA | One-year fixed rate Cash ISA | 1.75% | 1.75% | 1.75% | £1 |
Metro Bank Cash ISA | Instant access ISA | 1.65% | 1.65% | 1.65% | £1 |
*Not protected by the Financial Services Compensation Scheme
**Anticipated profit rate
As you can see, the returns on many of the peer-to-peer and current accounts beat the ISAs, even after tax. The beauty of the current accounts is you have instant access to your money too.
So if you’re a non- or basic rate-tapxpayer, it might be worth ignoring this year’s ISA crop in search of income now from other sources. The same arguably applies if you don’t have a lot of savings and don’t think you’d get close to your ISA limit anyway.
Perhaps if the banks and building societies don’t see as much money going into ISAs, they might be tempted to review their rates when the next tax year begins on 6th April?
