While interest rates have started to creep up, times are still tough for savers – and Isa rules may restrict where you can put your money. But a new type of Isa account may help you secure the best rates on your cash.
To earn a rate that beats inflation, you usually have to lock your money away for several years – which may be less appealing when a rate rise may be on the horizon.
The alternative is to settle for an account offering a lesser rate, where your savings depreciate over time due to the effect of inflation.
But there is another way, if you’re willing to split your savings.
Which? has looked into how you can get high returns without losing access to your cash.
Cash Isa accounts that let you diversify
Usually, you’re restricted to paying into just one cash Isa account per tax year. This can be restrictive, especially as Isa rates have been pretty low recently.
However, there are products that allow you to pay into Isas of different terms in the same tax year – all under a single cash Isa account.
Charter Savings Bank’s Mix & Match account allows you to open and pay into as many different term accounts as you like.
This means you could open and pay into any of its easy access, notice or fixed-rate cash Isa accounts in the same tax year without violating the rules.
For example, you can keep a chunk of money available for emergencies – like buying a new boiler – earning 0.5% AER in the Charter Savings Bank Easy Access Cash Isa account, while you lock the rest away for slightly longer.
Say you then split the rest of your savings between the 95 Day Notice Cash Isa at 1.4% AER, the 1 Year Fixed Rate Cash Isa with 1.52% AER, its 2 Year Fixed Rate Cash Isa with 1.69% AER and the 5 Year Fixed Rate Cash Isa offering 2.29% AER.
You’d be able to have access to cash in just over three months with the notice account, and then your other cash would become accessible in stages over the course of five years.
Note that each account requires a minimum deposit of £1,000.
The Online Isa from the Post Office also offers something similar.
Should I get a mixed Isa account?
These accounts offer much more choice about how to save your money within a single cash Isa wrapper, and could mean that your savings receive a boost.
There’s also the advantage of having all of your Isa savings in one place, as it means there’s no danger of forgetting about, or losing track of, an account.
All money held within an Isa is tax-free, which is a huge bonus if you have a lot of savings.
The downside is that you are restricted to the small number of banks who offer these accounts, and the products they offer – which may not have the most competitive Isa rates or the specific fixed terms you want.
You also can’t deposit more than your total Isa limit of £20,000 per tax year.
- Find out more: How to find the best cash Isa
Set up your own rolling fixed-term portfolio
An alternative way to break up your savings is to put them into a mix of fixed-term bonds and easy access savings accounts.
Which? Money Compare allows you look at hundreds of providers and compare savings accounts to find the best deal. You can also use the tool below to work which type of savings account might be best for you.
The table below shows the highest rates currently on the market.
Just as with the Isa platforms, you can choose how you want to split your cash, but doing-it-yourself gives you the flexibility to choose the highest-rate accounts.
One approach is to divide your cash among fixed-term bonds so that one reaches maturity every year for five years. If you chose the top rate accounts in the table, this would mean all of your money will be earning at least 2.05% AER interest (currently offered by Atom Bank’s 1 Year Fixed Saver).
Each time you regain access to funds in an account, you’re free to either spend it, or reinvest it in another account.
After the first year, you could feasibly just keep reinvesting into a different five-year account, as this would mean you’ll benefit from some of the highest rates on the market, yet still have access to some of your cash every year.
The diagram below illustrates how this could work over the next seven years.
You have to stick to using savings accounts for this, as you’re only able to pay into one cash Isa in each tax year.
The downside of is that the interest you earn from your savings will no longer tax-free.
While there is a personal savings allowance of £1,000 for basic-rate taxpayers, and £500 for higher-rate taxpayers, all interest earned by additional-rate taxpayers will be taxable, as will any money over the personal savings allowance threshold.
- Find out more: How to find the best savings account
Don’t forget current accounts
Several current accounts currently have even higher rates than long-term fixed-rate savings and Isas.
The great thing about this approach is that all your money is fully accessible in these accounts.
However, many require a certain amount of money to be paid in each month – basically, banks are encouraging you to have your salary paid directly into the account.
The table below shows the current accounts with the top AER rates, and how much is required to be paid in each month.
But there is a loop hole. It’s possible to open more than one of these current accounts and set up direct debits to move cash between them.
So, for instance, you could get your salary paid into the Nationwide FlexDirect account, fulfilling its minimum monthly funding.
Then, depending how much money you have to move around, you could split it between, the TSB Plus Account and Tesco Bank Current Account to fulfil those minimum monthly fundings, and then even move it on to another account elsewhere.
This will take some time to set up, and you’ll need to check whether you have to fulfil other criteria such as setting up a certain number of direct debits from each account.
You’ll need to be aware of each account’s terms – the Nationwide FlexDirect account, for instance, only pays 5% interest on balances up to £2,500, and the high interest rate is only available for a year.
Therefore, you’ll need to make sure you don’t pay too much money into this account – as it won’t earn any interest – and once the 5% rate finishes, consider switching elsewhere.
- Find out more: Best bank accounts if you always stay in credit
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.