Ask Our Expert

Is it worth getting an ISA?

Dear Chris,

I’ve just started saving and I’ve read that the best place to put your cash is in an ISA, so you don’t have to pay tax.

However, I’ve been having a look around and the rates look pretty poor. Is it really worth getting an ISA at the moment?

Kind regards,

Claire, by email on 19 January 2010

Our money expert says...

Securing a decent savings rate in the current economic climate can be very difficult, and the jump in inflation announced today is only going to make it harder to stop your savings being eaten away.

So, you’re right to want to find the best place to stash your hard-earned cash.

ISA or savings account?

As you have noticed, ISA rates are very poor at the moment. The average variable rate cash ISA is paying just £8.72 annual interest (73p a month) on a balance of £3,600, according to financial information Moneynet.co.uk.

The average one year fixed-rate cash ISA is paying slightly more at £23.48 per year, but the returns are still quite pitiful.

Returns on standard savings account are also very low at the moment, but there are exceptions. If the best savings account you can find offers a better return (after tax) than the best ISA you can find, you might consider taking that.

For example, if you have just started saving and plan to save a certain amount each month, then you may be able to get a good deal with a regular savings account. These reward you for making regular deposits, and offer some of the best savings rates on the market.

Who offers the best savings rate?

At the time of writing Barclays is offering 4.25% interest on its Monthly Savings account, which requires you to pay in between £20 - £250 per month.

However, if you do choose to opt for a non-ISA savings account you need to accept that you may lose your unused ISA allowance for this year. You can save £3,600 in a cash ISA this tax year (if you are under 50), then £5,100 a year from April, but the allowances don’t roll over.

Our recommendation

The main advantage of filling up your ISA is that the money will be protected as ISA cash permanently and you will be able to earn tax-free interest on it indefinitely. So, when savings rates do eventually pick up, having money stored in an ISA may be beneficial.

The type of account that will best suit you depends on whether you are building up a nest egg for the long-term (in which case an ISA may be better) or saving up for the short-term (in which case you may be better choosing a higher rate standard savings account).

Also, if you don’t think you’ll save more than £5,100 before April 2011, you may decide to save in a regular savings account for a year, then transfer the cash to an ISA before next April when rates will hopefully have picked up.

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