Cash Isas have been a favourite among British savers since their launch 22 years ago. More than eight million people pay into one every year.
But the patience of cash Isa savers has been tested in the past year as rates have sunk to new lows in response to two cuts to the Bank of England base rate.
Even with large balances, it is now difficult to get more than a few pounds in interest on your cash Isa – scant reward for the effort and restraint it takes to diligently put money aside for the future.
Yet the extraordinary 12 months that we have all endured is a reminder that the value of a nest egg goes way beyond the interest that it earns. Having a financial buffer in the face of unemployment, illness and unforeseen expenses can prove invaluable.
Cash Isas have been a favourite among British savers since their launch 22 years ago
For this reason alone, it is often worth sticking with a cash Isa even when rates are pitiful.
Of course, interest rates are not irrelevant. It still pays to shop around and make sure you’re getting the best return possible.
Rachel Springall is a savings expert at the financial data scrutineer Moneyfacts.
She says: ‘Interest rates across the savings spectrum have fallen to record lows and may cause apathy among many savers. But it’s still important that cash Isa savers take the time to hunt down the top rates.’
How to select the best cash Isa
In general, the longer you can afford to lock your money away, the better the interest rate you are likely to get on your cash Isa.
But if you think interest rates could rise in the future, it may be worth not locking your money away now and waiting for a slightly higher rate.
The best interest rate currently available on a cash Isa is 1.25 per cent a year from Shawbrook Bank. But you need to put away at least £1,000 for seven years to get this fixed rate.
Gatehouse Bank and UBL UK currently offer 1.15 per cent annual fixed rates, but both require that you leave your cash untouched for five years.
If you fix for three years, Gatehouse Bank offers an annual return of 0.8 per cent, while for two years the best fixed rate is 0.65 per cent a year from State Bank of India (branch only).
Meanwhile, the best one-year fixed-rate Isas pay 0.5 per cent annually and are offered by building societies Tipton & Coseley and West Brom. You can get a slightly higher rate with an easy access Isa from Al Rayan Bank. It pays 0.6 per cent a year.
The longer you can afford to lock your money away, the better the interest rate you are likely to get on your cash Isa
Can you still beat inflation?
Inflation, as measured by the Consumer Prices Index, currently stands at just 0.7 per cent – well below the Bank of England’s target of 2 per cent.
Yet the best paying easy access cash Isas cannot beat it. That means that if you put your money into one of these Isas, the real value – or purchasing power – of your savings will fall.
The top five easy-access Isa accounts currently pay on average 0.44 per cent, according to the rate scrutineer Savings Champion.
However unexciting this may sound, this average rate is still higher than the 0.1 per cent that many Isa providers are paying customers who have not moved their money for some time.
Why not just use a savings account?
When the personal savings allowance was introduced in 2016, savers wondered whether it would mark the beginning of the end for the cash Isa, especially as in recent years general saving accounts have often offered higher interest rates.
And the personal savings allowance allows most savers to receive up to £1,000 in interest every year without paying a penny of tax on it. For higher rate savers, the allowance is £500 a year.
With interest rates as low as they are, you would need to have some serious savings to be able to make more than £1,000 in interest in a single tax year.
But cash Isas have several advantages over traditional savings accounts. For a start, there is no knowing when a future Government could withdraw or cut the personal savings allowance.
Should that happen, savers with money in savings accounts might have to start paying tax again on their interest.
By comparison, once money is in a cash Isa, it is sheltered from the taxman indefinitely. And once your money is in a cash Isa, you can move it into other types of Isa.
For example, if you think you may want to invest in the future, it can be savvy to put money into a cash Isa now so that its tax-free status is ensured when you’re ready to transfer it into a stocks and shares Isa.
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