Are ISA’s the best deal?

So what if you suddenly had £15,000 spare? Nice thought eh? But would an ISA give you the best deal for savings?

I’ll ignore those that say you could put it all on black at the casino, or horse number 5 in the 3 ‘o’ clock race at Ascot and look sensibly at what most people want, a safe, risk free home with the best deal.

In the UK both personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs), were replaced in 1999 by individual savings accounts (ISA’s), which promised excellent returns whilst allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest, and capital gains.

Unfortunately as we head towards 2016, savings rates continue to tumble, which means we must now work harder to get decent returns on our money and why we need to regularly check-in with and review your personal situations.

Typically 12 month cash ISA’s are paying between 1.4 and 1.51% (october 2015) from the likes of Virgin money, Post office, HSBC and NS&I among others, all in the same pricing area. For our example however, we’ll take Nationwide as they have the top 1.51% rate of this group. So invest £15k in this ISA and you will get tax free interest of  £226.50 after 12 months.

So what if you were to put your £15k into a bank or building society current account? Here it gets a little trickier as basic accounts can pay zero to under 1% interest, but such is the competition that many of the leading banks are currently offering good deals to switch your main account to them.

  • Headline figures of 5% are currently being advertised e.g. Nationwide, who also offer a £100 cash back bonus too, but you must read the small print. High interest is often limited (in our Nationwide example to a maximum balance of £2500), thereafter the interest drops to 1% and there may be other conditions too e.g. Nationwide ask you make £1000 deposit each month to keep up this account. So investing your £15k here, taking account of spreading this out over the 12 months to meet the rules, means you’d earn interest of  @ £295 after 12 months, but basic rate tax (20%) would reduce this to £236, but still better than the ISA.
  • Putting the same amount into Santander’s 123 current account (paying 3% on balances between £3,000 and £20,000), again taking account of spreading this out over 12 months to meet their rules (minimum £500/month plus a £24 annual fee), you’d earn interest of  @ £343.50 after 12 months. Again tax would reduce this to £274.80, but still 21% more interest than with the Isa, and with an additional range of cashback benefits of between 1% and 3% on key areas of your regular monthly spend on top.

Of course we aren’t saying don’t use an ISA, and as always with these things, offers do change and it really depends what areas are of most benefit to you, so we are saying you do need to shop around and don’t be embarrassed to change….its your money at stake!

Check out our 1 stop comparison page regularly to see if you could save money.