I have £60,000 saved in my cash Isa with a high street bank. I read an article recently explaining how peoples’ savings are being eroded because of high inflation combined with the fact that interest rates are so low. It terrified me.
I’ve since checked what interest rate I’m on and discovered I’m earning just 0.4 per cent. I was wondering whether there is any point keeping the cash in an Isa and if so how hard would it be to transfer it to another provider that pays more?
I’m also wondering whether, mortgage rates also rising, it might be sensible to instead use the money that’s in the Isa to pay off some of our mortgage?
Our current rate is only 0.4 per cent and that is fortunately fixed for a further three years, so maybe I’m being overly cautious. What would you advise and is there anything else I should do with the money, such as investing? Via email
Shop around: The best buy easy-access cash Isa accounts pay 1.4% interest. Most are offered by small banks and none of the major high street names come close to competing
Ed Magnus of This is Money replies: No matter where savers are storing their cash, its real-term value will unfortunately be going down.
This is because there isn’t one savings rate that gets anywhere near to matching the rate of inflation – currently 9.1 per cent.
In your account paying 0.4 per cent interest, the ‘real’ value of your £60,000 would effectively shrink by £5,220 in a year’s time, if inflation remained at that same rate.
The rate of inflation is something outside of your personal control – but what is within your control is where you choose to save or invest your money.
Anyone who has a cash Isa with one of the high street banks is likely to be getting a shoddy return.
For example, Barclays, NatWest and RBS all pay between 0.1 and 0.2 per cent interest on their easy-access cash Isa deals, depending on the balance.
Although even the best cash Isas don’t get close to the rate of inflation, it is still worthwhile having one to shield money away from the taxman.
However, at 0.4 per cent, you’ll earn only £240 in interest after one year from £60,000.
Such a low rate of return makes a cash Isa barely worth having, given you already get a tax-free savings interest allowance of £1,000 a year if you’re a basic rate taxpayer and £500 if you’re a higher-rate taxpayer.
With the help of a financial planner, I looked into where your money would be best spent – or saved.
Laura McLean, a chartered financial planner at The Private Office replies: With inflation higher than the rate of interest you are getting on your savings, the value of your cash, or the number of goods and services that you can buy with this money, is reducing.
Your current rate of 0.4 per cent, however, could be improved upon by more than 1 percentage point by opting for the best easy-access deal on the market.
This is still of course some way below current inflation, but it is in line with your current mortgage rate.
You could also consider a fixed rate Isa, provided you don’t need access to the money in the interim; tying up the cash for 1, 2 or 3 years would increase the rates above 2 per cent.
To move funds, you would just need to complete a transfer form at the time of application, either online or by post, and typically the monies would be received with the new provider within 10 working days.
Provided you hold back a suitable cash buffer, you do have the flexibility to pay down some of your mortgage.
Options: This reader could use his savings to pay off some of his mortgage, but financial planner Laura McLean believes switching to a new cash Isa is a better short-term option
However, with more competitive rates available, in line with or above your current interest rate, I would suggest moving to a better cash Isa for the time being, to earn more interest and retain access to cash.
In 3 years’ time you could then consider paying down some of the debt to secure a better mortgage rate.
Investment into the stock market can provide opportunities for long-term growth above inflation, however, as values can fall as well as rise, this option should only be considered over a period of 5 years or more.
Which Isa provider should they transfer to?
Ed Magnus of This is Money replies: The best deal currently available is offered by Newcastle Building Society, paying 1.5 per cent. It would be possible to transfer your money from your current Isa provider.
Stash £60,000 in that account and you could expect to earn £906 in interest after one year – £666 more than what you’re currently getting.
However, you are restricted to three withdrawals a year. If you make more, your rate will drop to 0.75 per cent.
If you’re someone who occasionally dips into your cash Isa savings, this might not be the best option.
In terms of cash Isa deals that give you easy-access whenever you want without any restrictions around withdrawals, it’s still possible to do three and half times better than 0.4 per cent at the moment.
Cynergy Bank and Shawbrook Bank both currently pay 1.4 per cent.
On a balance of £60,000 that equates to £600 more interest over the course of a year.
Both providers offer unlimited withdrawals and are fully FSCS protected, meaning your money is protected up to £85,000, just as it will be with your current provider. As do all the providers we mention.
Cynergy Bank requires just £1 to get started, whilst Shawbrook Bank requires a minimum £1,000 deposit to open an account.
Both providers allow you to transfer your existing Isa from your current provider.
If you wish to make a transfer to Cynergy you must do at the point of application. You cannot transfer any Isas once it has opened, so ensure you submit your transfer request when you apply.
Similarly, you can transfer your existing cash Isa account to Shawbrook, but you must first apply for its account.
Shawbrook will ask you about your current Isa as part of the application process. It will then work with your current provider to complete the transfer.
Alternatively, if the £60,000 is something you don’t envisage touching for a year or two, then it could be worth looking at fixed rate cash Isa deals for a better return.
This is where you agree not to withdraw your money for a set period, in exchange for a better interest rate.
The best one-year and two-year fixed rate cash Isa deals are both offered by Virgin Money, paying 2.12 per cent and 2.56 per cent respectively.
On a £60,000 balance that could mean £1,284 of interest after one year or £3,149 after two years. Given that your current provider will pay you £240 over one year, that represents a big improvement
How to transfer an Isa
You can transfer your Isa from one provider to another at any time. This includes being able to transfer your cash Isa to a different type of Isa such as a stocks and shares one.
If you want to transfer money you’ve saved or invested in an Isa during the current year, you must transfer all of it.
For money you saved or invested in previous years, you can choose to transfer all or part of your savings.
To switch providers, you need to contact the Isa provider you want to move to and fill out an Isa transfer form to move your account.
If you withdraw the money without doing this, you will not be able to reinvest that part of your tax-free allowance again.
Isa transfers should take no longer than 15 working days for transfers between cash Isas, although you should allow up to 30 calendar days for other types of transfer.
Should our reader pay off their mortgage?
Ed Magnus of This is Money replies: It is hard to ignore the speed at which mortgage rates are currently rising.
Five year fixed-rate deals are now at an average of 3.89 per cent, a 0.52 percentage point increase compared to June and the highest interest since November 2014, according to Moneyfacts.
However, being on a fixed rate mortgage deal means you are protected from these rate rises until you come up for renewal. For you, this is in three years’ time.
How much you can pay off your mortgage will be limited by the fact that most mortgage deals place a maximum limit on how much you can repay each year.
The majority of fixed-rate mortgage deals allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges. Some are more flexible whilst others may be more restrictive.
Early repayment charges typically range between 1 and 5 per cent of the total mortgage amount.
You could opt to pay off some of your mortgage each year, whilst keeping the rest of the money in savings.
Alternatively, it might also be worth waiting until your existing mortgage is up for renewal in three years. This is a good time to make a larger overpayment without risking charges.
In the meantime you can keep your money earning interest in a cash Isa. Just make sure you opt for a more rewarding deal than your current one.
Should they start investing?
Ed Magnus of This is Money replies: Investing gives you the chance to potentially earn more interest than you would in a savings account – though of course that depends on how your investments perform, and you could end up losing money.
This could be an option for you if you understand the risks, and are prepared to take a long-term view and invest with at least a five or 10-year timeframe in mind.
However, stocks and shares may seem like a risky option given that global markets have endured a turbulent six months with sharp declines in both the equity and bonds markets against a backdrop of high inflation, rising borrowing costs and slowing growth.
After a long bull market of rising share prices, many retail investors have found their Isas and pensions hard hit from being too heavily exposed to areas like US equities and sectors such as technology and communication services.
Those new to investing may be nervous about buying into the markets amid so much uncertainty.
For those prepared to take the plunge and risk short-term losses, then looking for the most cost-effective way to invest is a good idea.
Therefore, if you decided to invest, you might wish to consider an online DIY investing platform.
Many of the investing platforms allow customers to invest in a large range of funds, investment trusts and individual stocks and shares – although the range of choice varies between providers.
For those who would rather not have to make any decisions themselves, there are also options that mean they won’t have to make a choice.
Online investment management services like Nutmeg, Moneyfarm and Wealthify will invest on your behalf in accordance with your personal risk profile.
When weighing up the right one for you, it’s important to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
This is Money has written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide.
Once you have chosen which platform or provider to use, the next task is to choose what to invest in.
Free coaching sessions with a qualified financial planner
For those who want some extra guidance on how to manage their money, there are a now number of businesses offering online coaching sessions with qualified financial advisors.
These include Claro, Octopus Money Coach and Bestinvest.
The total bill for consulting a financial adviser will depend on how complex your financial needs are and how much time you need.
The hourly fee can range from £75 to £350, but a typical hourly rate is usually £150 according to the Government website Money Helper.
The financial planning app, Claro offers a 1:1 session with a coach, who it says will work with customers to create a plan to achieve the goals.
You can currently sign up to a free subscription for the first year, you also get a free first session with an advisor.
After that you will pay between £60-£80 an hour, depending on your needs.
Claro says its coaches will work with you to create a plan to make your goals a reality no matter what financial stage you are at
Octopus Money Coach also offers one-to-one sessions, and the first session you have will also be free. After that it costs £299 a year – or just shy of £25 a month.
It says your coach will build a plan designed around your goals, covering everything from budgeting to saving and mortgages to pensions.
You and your coach can catch up every three months and they will give you a year-by-year forecast of your financial situation.
The investment platform Bestinvest is currently offering free investment coaching with qualified financial planners, whether you are a platform customer or not.
Coaching sessions with Bestinvest can be booked directly through the website, with meetings held by video link or over the phone.
It says the coaches can provide guidance on whatever query investors have during their investment journey – from reassurance for those with existing investments on the performance of their portfolio, to tips on sustainable investing or how to ensure a pension lasts your entire retirement.
The service can also help those new to investing identify their financial goals and how they might achieve them, whether it is investing to pay off a mortgage, finance a child’s university education or fund retirement.