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Are cash Isas still worth your while?

Average cash Isa rates at their lowest ever

Gold piggy bank

Average cash Isa rates have fallen below 1% AER for the first time ever

As interest rates on cash Isas hit an all-time low and pay less than ordinary savings accounts, Which? weighs up whether they’re still a good home for your money. 

Traditionally, cash Isas offered a better return once tax was taken into consideration. However, since the personal savings allowance was introduced on 6 April 2016, this is no longer the case.

Basic-rate taxpayers can earn £1,000 tax-free on any interest from savings or current accounts. Higher-rate taxpayers are entitled to a smaller allowance of £500.

This allowance is separate from the Isa limit, so you’ll be able to get up to £1,000 of interest tax-free from standard accounts, in addition to any tax-free interest you receive from a cash Isa.

Cash Isas lag behind traditional savings accounts

Over recent weeks, we’ve seen rates on fixed-rate cash Isas fall below the rates offered on equivalent ordinary savings accounts. For example, the top-paying two-year fixed-rate savings account in the Which? Money Compare tables pays 1.6% AER, while the equivalent cash Isa deal pays just 1.15% AER. 

The gap between savings accounts and cash Isa rates widens even further on longer-term fixes. For example, the top-paying four-year fixed-rate savings account in the Which? Money Compare tables pays 1.81% AER, while the top-paying four-year fixed-rate cash Isa pays just 1.3% AER. This equates to £215 less interest earned on £10,000 over a four-year term.

The Which? Money Compare savings and Isa tables let you search hundreds of savings accounts and Isas from providers large and small to find a great savings rate based on quality of service as well as cost and benefits.

Which? Money Compare tables: savings accounts and Isas – hundreds of accounts compared 

Benefits of saving in an Isa

Despite currently offering lower rates than traditional savings accounts, cash Isas do future-proof your savings. The personal savings allowance may seem generous while interest rates are so low, but what happens when interest rates or the amount of cash you have saved starts to rise?

You can switch your cash Isa savings to a stocks and shares Isa whenever you wish, so you’ll have almost no tax to pay on the gains you make. 

Also, spouses and civil partners can inherit each other’s Isa allowance tax-free. The surviving partner is entitled to an ‘additional permitted subscription,’ equivalent to the value of the deceased person’s Isa at the time of death.   

Find out more: are Isas still worthwhile? – our guide explains all the pros and cons

Other types of savings account worth considering

Interest-paying current accounts

Savers can earn up to 5% AER by storing cash in their current account, but only on small balances. 

Nationwide offers 5% AER on balances up to £2,500 in the first year (1% thereafter). TSB currently offers 5% AER on balances up to £2,000, although in January this rate will drop to 3% AER on balances up to £1,500.

For those with a higher balance, the Santander 123 current account is worth considering as it offers 1.5% AER on balances up to £20,000, but it comes with a £5 monthly fee.

All of these accounts require customers to make a minimum monthly deposit and meet other terms to earn interest. 

Find out more: best current accounts for customers who stay in credit – see our tables for more information

Regular savings accounts

If you have a current account with a regular savings account tied to it – and you’re able to drip-feed a fair chunk of money into it each month – it’s well worth doing so. 

Many regular savings accounts offer far better rates than other types of savings accounts or Isas, but you’re limited to a maximum monthly deposit and won’t usually be able to access your funds until the end of the 12-month term. 

By drip-feeding the maximum monthly deposit into the best rate regular savings accounts from First Direct, HSBC, M&S Bank and Nationwide (all paying 5% AER), you could earn as much as £165 after 12 months.

Kent Reliance’s Regular Savings Account, which is the best regular savings account in our tables that isn’t tied to a current account, pays 3.25% AER.

For each of these deals, we’ve included links to the Which? Money Compare tables, where you can find out more about each deal.

Which? Money Compare table – regular savings accounts – our tables are updated daily

Find out more…

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.  

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