ISAs used to be the darling of the savings market, yet in recent years they've begun to lose their shine, with the Personal Savings Allowance (PSA) all but sounding the death knell for these tax-free accounts. So, are these once-loved accounts still worth it? We investigate.
Probably the best place to start is to compare cash ISA rates with those of traditional savings accounts. Below you can see a brief overview of the best savings rates available for each sector, covering everything from easy access deals to long-term bonds, to give you an idea of the current market – and as you can see, in all cases, traditional accounts pay far better rates of interest than their cash ISA counterparts.
|Best cash ISA rate||Best savings rate|
|Easy access||1.05% (Paragon Bank)||1.25% (Ulster Bank)|
|Notice account||1.21%||1.65% (Secure Trust Bank)|
|Two-year bond||1.36% (United Bank UK)||2.11%|
|Three-year bond||1.50% (Virgin Money)||2.25%|
|Long-term bond||2.00% (Virgin Money)||2.60% (PCF Bank)|
|Rates correct as at 16.08.17|
At first glance, it looks as though traditional savings accounts easily win the day, with the interest rates available being far higher than those that can be achieved with cash ISAs. The fact that the PSA allows basic rate taxpayers to earn up to £1,000 in interest tax-free each year means that all but the wealthiest of savers should comfortably be able to enjoy tax-free returns, without the need of an ISA, particularly given how low rates are at the moment.
However, therein lies the rub. Rates may be low right now, but they may not stay that way forever – our latest research shows that they're already beginning to edge up, particularly in the fixed rate bond market – which means that the amount you can save tax-free could shrink under PSA rules in the future.
For example, let's say you wanted to lock your money away for a year, and opted for one of the best one-year bonds available – the from BLME that pays an expected profit rate of 2.00%. Currently, you could invest up to £50,000 in that bond and would still only just hit the £1,000 allowance, keeping your returns comfortably out of the taxman's reach.
However, what if rates went up? An interest rate of 5% would mean you'd only be able to save £20,000 in order to secure tax-free returns, and although that rate may sound unheard of in the present climate, it was a common occurrence a few years ago – and hopefully will be again in the future.
Then there's the fact that there's no telling how long PSA rules will last for, which means that any savings you have in traditional accounts could become taxable again in the future. This isn't the case with an ISA, where all savings remain tax-free for life – which means you can build a huge pot over the years and still wouldn't have to pay tax on it.
Given the potential pitfalls and benefits of each method of saving, perhaps the best option is to opt for a mix and match approach, particularly if you've got a decent savings pot. Provided you take the time to hunt out the best savings rates for each kind of account, there's no reason why you can't split your savings between the two, thereby ensuring healthy interest now as well as guaranteeing tax-free returns for the future.
However, another option could be to think beyond cash, at least where ISAs are concerned. Opting for a stocks & shares ISA has the potential for far greater returns than can be achieved in the cash savings market, with even the best rate of 2.60% often looking minimal by comparison. There's no guarantee, of course, with the higher level of risk involved meaning you could end up with less than you put in, but if you go into it with your eyes open and make sure you do your research into stocks & shares ISA funds, it could be worth it.
Compare the top non-ISA savings accounts
Not ready to give up on cash ISAs? Find the best rates
Learn more about stocks & shares ISA to see if this form of saving (or, more accurately, investing) could be for you
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.