A combination of record low interest rates and a super-competitive financial market means that much of the received wisdom surrounding savings is being challenged.
From their inception in 1999, ISAs have been a smart choice for investors, offering tax-free savings in order for people to maximise their money.
The Mirror recently highlighted data from financial information firm Defaqto which showed that the average rate offered by current accounts paying interest on balances of £5,000 is 1.65%, while for ISAs that figure stands at just 0.81%/
The article goes on to point out how you could earn as much as three times more interest from a current account compared to an ISA. Not only that, but the first £1,000 of interest earned by basic rate taxpayers in any account is no longer taxed in what’s known as the Personal Savings Allowance (or £500 if you are a higher rate payer).
So, should you just ditch the ISA and stick to a current account? Well, not necessarily.
Firstly, it’s important to note that the best deals for current accounts might well come with a cost attached. The highest rates advertised might only be applicable on a limited chunk of your balance, for example, or might require you to pay a fixed fee every month. It’s important to weigh up the cost of any fees attached to a bank account and consider whether or not paying these might well negate any benefit to be had from a higher interest rate.
It’s likely that you’ll also need your current account to be ‘busy’ on your behalf. Whether it’s direct debits, standing orders, transfers or cash withdrawals, there are plenty of features of a current account that are a ‘must’ for many people. There’s nothing to say that this can’t happen at the same time as storing your savings, but it might well make it tougher to track how much you have to hand if the money you want to set aside for a rainy day sits side-by-side with the money that comes in and out of your account for essentials.
The scope of an ISA has also been increased in recent years, with the annual limit that can be paid in now rising to £20,000 (it was £3,000 a year for Cash ISAs in 1999). Not only that but, if interest rates pick up then many people might soon find that their Personal Savings Allowance disappears quickly, especially if they are a higher rate taxpayer, and that will mean that the tax benefits of an ISA continue to be a big strength of such accounts.
It is also perfectly possible to find good deals on ISAs, albeit ‘good’ in the context of 2017 interest rates and not 1999, when 6.5% was commonplace. The proviso here is that you need to be able to put your cash to one side for a number of years, with the best deals available for those who can afford to leave their savings untouched for five years. On top of that the Lifetime ISA, newly launched, is specifically geared up towards helping those savings for a first home or retirement.
There’s certainly life, therefore, in the ISA yet. While current account deals might be favourable in some circumstances in the current day, it’s worth keeping an open mind and looking beyond the headline rate in the adverts.
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