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Cash Isas are on the decline – what’s the best thing to do with your savings?

Find out where you can get the best returns

The number of people who opened new cash Isa accounts in 2017/18 tumbled by 697,000 in comparison to 2016/17, HMRC’s latest Isa statistics report reveal.

But, the number of people who subscribed to stocks & shares Isas had rocketed by a quarter of a million.

Which? looks at whether it’s still worth saving into a cash Isa, and what the alternatives are if you decide it’s not right for you.


Are cash Isas still worth using?

Cash Isa interest rates have been lacking for some time now, but there are still some good deals out there.

The highest rates are usually offered on fixed-rate cash Isas, requiring you to lock your money away for several years.

The table below shows the best fixed-rate cash Isa rates, from one- to five-year terms.

Cash Isa account AER Minimum initial deposit
Shawbrook Bank 5 Year Fixed Rate Cash Isa Bond 2.3% £5,000
Hodge Bank 4 Year Fixed Rate Cash Isa 1.8% £1,000
Shawbrook Bank 3 Year Fixed Rate Cash Isa Bond 1.85% £5,000
Al Rayan Bank 24 Month Fixed Term Deposit Cash Isa 1.8% (EPR) £1,000
Al Rayan Bank Fixed Term Deposit Cash Isa 1.6% (EPR) £1,000

Source: Which? Money Compare. Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of the savings account provider before committing to any financial products.

As the table shows, to beat the current rate of inflation you’d need to lock your savings away in a cash Isa for five years, and have a minimum initial deposit of £5,000.

If you don’t have at least £1,000 as an initial deposit, it’s likely you’ll only be able to access even lower rates.

A fixed-rate cash Isa may not be feasible for everyone. If you need to access the cash before the five year term is over you could face an early exit charge of as much as 360 days’ interest, which is almost a year’s worth of saving.

While opting for a notice account or regular saver cash Isa will usually pay higher interest than an instant-access cash Isa (the highest rate to be found here is 1.35% expected profit rate, or EPR, from Al Rayan Bank’s Instant Access Cash Isa), none rival the rates offered by fixed-rate accounts.

Should you consider a stocks & shares Isa?

If you have had enough of investing in cash, a stocks & shares Isa could be worth considering. Some 246,000 people did so in the last tax year

Like cash Isas, all money held within a stocks & shares Isa is tax-free. It makes up part of your overall Isa allowance, which is currently £20,000 per year.

So, if you’ve already paid in £10,000 to a cash Isa in this tax year, you’ll have £10,000 left to put in a stocks & shares Isa. Alternatively, you may be able to transfer money held in a cash Isa into a stocks & shares Isa.

Fees

You will also be charged fees, either each month or annually, to cover the cost of investing and managing your money with your stocks and shares Isa provider (sometimes called ‘investment platforms’).

Providers will have different charges – some will charge a percentage of the money you hold in your account, others will charge fixed fees for your account and every trade you make.

Percentage fees tend to suit people with smaller levels of investments, whereas fixed fees work out cheaper for those with larger portfolios.

Potential returns

As a general rule, the riskier the investment, the higher the return. This depends on the type of investments you make and what happens to the stock market.

For example, the Vanguard FTSE All Share Index unit trust is a tracker fund, which means it holds all the shares in the FTSE All Share stock market index.

In 2017, it returned 13% and in 2016 it returned 16.6% – eight times as much as the best five-year fixed rate account. But in 2014 and 2015, the fund returned less than 1.1% each year, after returning 20.8% in 2013.

This is just one illustration of how the returns in stocks and shares can vary – any falls may even out and increase over time, but you have to be willing to wait it out.

Therefore, investments in stocks & shares are more suitable for those who can afford to leave their money untouched to grow over the long term, as rates generally get over smaller dips along the way – ideally even longer than five years.

While you won’t face a withdrawal penalty for accessing your money in that time, you should factor in not being able to access it for a long time.

Potential risk

The main thing to bear in mind about stocks & shares Isas is that they carry a higher risk than cash Isas; the rate your funds grow depends on the performance of the investments, and you may end up getting back less than you initially invested.

A number of factors, such as Brexit, natural disasters and economic crashes could have a dramatic impact on the stock market in years to come, but it’s difficult to predict exactly what will happen.

For this reason, if you do decide to invest in a stocks & shares Isa, you should make sure that you wouldn’t run into financial difficulty if this money was lost or significantly reduced. At least that way, any growth will be a bonus.

Best savings accounts

If you don’t want to invest your money, many savings accounts offer higher rates than cash Isas.

Once again, the highest rates are usually offered on fixed-rate accounts, so you’d still be unable to access your savings for at least a year. The table below shows the highest fixed-rate savings accounts.

Savings account AER Minimum initial deposit
Secure Trust Bank 5 Year Fixed Rate Bond 2.69% £1,000
Vanquis Bank 4 Year Fixed Rate Bond 2.52% £1,000
My Community Bank 36 Months Fixed Term Deposit 2.4% £1,000
Secure Trust Bank 2 Year Fixed Rate Bond 2.26% £1,000
My Community Bank 12 Months Fixed Term Deposit 2.1% £1,000

Source: Which? Money Compare. Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of the savings account provider before committing to any financial products.

Putting your money in the top five-year fixed-rate savings account will earn 0.39% more compared to a cash Isa held for the same term, and the minimum initial deposit is much lower.

Further to that, you could still earn get a higher rate of interest from the top rate three-year savings account (2.4% AER) than the highest rate five-year cash Isa (2.3% AER), meaning your savings would be able to grow at a faster rate and you’d be able to access them two years earlier.

There is a catch, however. While all money held in a cash Isa – or any Isa – is tax-free, profits earned in savings accounts are not.

Your personal savings allowance is the amount of profit you can make from your savings in one tax year before having to pay income tax on it.

Your allowance depends on what rate of income tax you usually pay.

Basic-rate taxpayers have a personal savings allowance of £1,000 per year; for higher-rate taxpayers it’s £500; additional-rate taxpayers do not receive this allowance and must pay tax on all interest earned from their savings.

Find the right place for your savings with Which? Money Compare, where you can find hundreds of savings and Isa accounts.

High interest current accounts

Alternatively, you could use a high interest current account to grow your savings.

There are usually quite a few caveats to fulfil in order to qualify, and the amount you can save is often restricted, but they can be a good option for those who need access to their money, or don’t have enough for the minimum deposits needed for other accounts.

The Nationwide Building Society FlexDirect account pays 5% AER on balances up to £2,500 for the first 12 months (the rate then falls to 1% after this).

You must pay in a minimum of £1,000 a month (but you’re free to withdraw it whenever you like), so you could get your salary paid into this account to make sure you reach this.

This account also has the advantage of Nationwide Building Society being one of the Which? Recommended Providers – these are companies that have been rated highly by the respondents to our unique customer survey and have products that meet the high standards of our researchers.

Elsewhere, the TSB Plus Account also pays 5% AER, but on balances up to £1,500. You must pay in at least £500 a month and register for internet banking/paperless statements.

Tesco Bank’s Current Account offers 3% AER on balances up to £3,000. You must pay in £750 a month, and you also have to pay out three direct debits.

As an extra bonus, you’ll earn one Tesco Clubcard point per £1 spent on the debit card at Tesco, in addition to your normal Clubcard points.

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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