Want a nicer ISA?

Want a nicer ISA? main image

The average interest rate on a 1 year Cash ISA has plummeted by a whopping 40% over the last 3 years and only this week (4th September 2014) 17 providers reduced their interest rates even further!

So what exactly is going on?
It may seem like the banks and building societies are not so keen to get their hands on our cash right but their attention has shifted elsewhere for a couple of reasons:

Firstly banks can currently borrow money at an extremely cheap rate from the wholesale money markets, so the money they usually get from ISA’s which typically costs them a lot more is less appealing. Basically why pay a higher rate on ISAs to attract your money when they can get better rates elsewhere. Therefore they have reduced the rates offered on ISAs to make them less of a draw to you and I.

Secondly banks are now trying to make current accounts more appealing by offering higher rates of up to 5%, so joe public choose to place their money there rather than an ISA. So what’s the catch!

Before we get to the nitty gritty, it helps to understand how ISAs work.
An ISA offers you a tax free haven; a way of saving without paying interest on money, stocks and shares. Previously limited to £5,940 for cash and £11,880 for stocks and shares, the combined threshold for ISAs has recently been increased to £15,000 in any one tax year; so an appealing prospect for savers.

What’s not so appealing is the low interest rates that have been on offer which is why ISA activity has been slower. At the end of the day if you can get a higher rate of interest by placing your money into another type of account, even when taking tax into account, then that is the route you will probably take.

For example, if you invest £10,000 in an ISA at 1.5%, the interest gained will be £150 per annum, however if you find an account that pays at least 2% and you are a basic rate tax payer, then you will be better off, with interest totalling £160 once tax has been deducted (1.6%).

When you look at the extent banks are going to to attract customers to their current accounts, it’s little wonder ISAs appear to be falling by the wayside. Here are some of the best deals currently available:

Nationwide - 4.89% 5.00%AER
TSB - 4.89% 5.00%AER
Santander - 3.93% 4.00%AER

So what’s the catch?
Well actually there is no catch but you do need to study the details closely before switching as there will probably be conditions that may or may not suit you.

All deals will have a maximum cap as to how much of your savings will receive this super duper rate; so ensure you are happy with the rate of return on the rest of your hard earned cash.

Some may also have a more complicated tier system that requires you to pay a minimum amount into the account every month; so again be certain you can pay that amount in consistently.

So ISA’s may no longer be flavour of the month but there are deals around for savers if you are prepared to look around and do your homework. The banks do want your business; just in a different way.

Whatsmore with the introduction of the ‘accounts switching service’, switching accounts has never been easier. Take a look at here to see if your bank has signed up.

So what should you do?
Well, the only way to get a NICER ISA is to move your money into a longer term fixed rate, but only do this if you are sure you won’t need to access it during the ‘tie in’ period.

Alternatively you can switch your current account to one that pays a good rate of interest but again, only if the terms & conditions work for you.

Everyone’s requirements are different so a good starting point is to check out the Savings Champion website for the best savings accounts.

But whatever you do, don’t forget the faithful old ISA altogether. Remember, if you don’t use your full £15,000 allowance this year it will be lost forever - so make a note in your diary to see about topping up your ISA account in March, just before the end of the tax year!

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