Average instant access Isa rate falls to 1%Are instant-access Isas still the best option?

04 July 2015

Gold Piggy

The average rate of an instant-access Isa has fallen to an all time low of just 1% AER, according to the Bank of England. 

So if you want easy access to your savings, are instant-access cash Isas still a good place to put your money? Here, Which? explores the alternatives.

For each of the products featured below, we've included a link to the Which? Money Compare savings tables, where you can find out more information.  

Instant-access cash Isas

Instant-access cash Isas are ideal if you don't want to tie-up your money and want to make use of your tax-free savings allowance (currently £15,240).

The advantages of cash Isas means you can build-up a huge lump sum of tax-free savings if you use the maximum amount allowed each year. Rates will also rise eventually, although no one knows when this will be. The top instant-access rate on Which? Money Compare for an account that is available to everyone without restrictions is from National Savings & Investments, at 1.5% AER.

Find out more: Compare instant-access Isas 

Fixed-rate cash Isas

Fixed-rate cash Isas usually reward you with a higher rate of interest than instant-access ones in return for tying-up your money for a set period (typically between one and five years).

However, you must be sure you can commit to locking your money away for the agreed term as accessing it earlier may trigger hefty penalties. Also, if interest rates rise during the fixed period, you won't benefit.

Find out more: Compare fixed-rate cash Isas

Taxable savings accounts

Ordinary savings accounts offer similar rates to cash Isas, but they allow you to deposit much more money. Unlike Isas, interest is taxable at 20% for basic-rate taxpayers and 40% for higher-rate tax-payers.

Find out more: Compare instant-access savings accounts

From April 2016, basic-rate and higher-rate taxpayers will be given a tax-free personal savings allowance. Additional (45%) taxpayers do not get a personal savings allowance.

This new allowance means that basic-rate taxpayers will pay no tax on the first £1,000 of savings interest they earn in a tax year. The allowance drops to £500 per tax year for higher-rate taxpayers.

Find out more: See our guide to the personal savings allowance

Current accounts

You can earn more interest on cash (up to 5% AER) in top-paying current accounts than in the best instant-access cash Isas. However, most banks limit the amount of interest that you can earn by capping the maximum level of savings on which they pay the high rate to a few thousand pounds.

You also have to meet certain conditions, such as paying-in at least a £1,000 each month and setting-up at least two direct debits.

Find out more: See our Best Rate table for current accounts paying interest on credit balances.

Stocks and shares

If you're happy to take some risk, stocks and shares Isas could be a good option as they offer the chance of higher returns than cash Isas, although returns are not guaranteed and you could get back less than you invest.

You can split your Isa allowance, and the ratio of cash to stocks and shares is entirely up to you.

To minimise risk, spread your investment across a range of assets and be prepared to leave your money invested for the long term, as the stock market has historically provided the best returns over long periods.

Find out more: See our beginners guide to investments - to learn more.

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