Interest rates went up again this week, leaving those planning to stash some money in a cash Isa facing a choice. If they want a (slightly) better interest rate – up to 1.9% at the time of writing – a fixed-rate Isa may be the way to go.
However, these involve tying up your cash at a set rate, often for several years, which might feel like an odd thing to do in the current uncertain climate, and when interest rates are marching upwards.
Easy-access Isas give you more flexibility and, in theory at least, might benefit from any savings rates increases that banks deign to pass on, but the rates right now are lower: the highest this week were around the 0.8% mark.
Nevertheless, one of the most popular deals is likely to be the easy-access cash Isa from Marcus, the Goldman Sachs online banking brand, which was this week paying a variable 0.7% (this includes 0.1% interest bonus fixed for the first 12 months).
You haven’t got long to make use of your 2021-22 Isa allowance. These accounts let you protect the returns on your savings from tax.
There are several types, although the two main ones are the cash Isa and the stocks and shares Isa. During the current tax year you can save up to £20,000 in one type, or across two or more.
You have until midnight on 5 April each year to add money, and the allowance each year does not carry over.
Some experts argue that the introduction in 2016 of the personal savings allowance means there is not much point in having a cash Isa. This allowance means basic-rate taxpayers can receive £1,000 of interest each year without paying any tax, while higher-rate taxpayers can receive up to £500.
But Isas still have their supporters, who say people should make use of the existing rules while they can. Some savers like the discipline of choosing an Isa each year. Also, you can transfer money from a cash Isa to a stocks and shares one without using up any fresh allowance. That gives you the option in the future of channelling your nest-egg cash into the stock market.
As to the choice between a fixed-rate or a variable-rate one (easy-access Isas typically offer a variable rate), Rachel Springall at the financial data provider Moneyfacts admits: “It’s a tricky one.”
Remember, you can often get a higher interest rate if you go for an account that isn’t an Isa. Effectively, you are paying a small premium for the long-term tax benefits.
For example, at the time of writing, the best-paying easy-access non-Isa savings account, from Virgin Money, was offering 1%. Meanwhile, the top-paying equivalent cash Isas included Internet Saver Isa Plus Issue 10 from Yorkshire building society, paying between 0.6% and 0.82% depending on the account balance, and Melton building society’s Easy Access Isa paying 0.8% (this account is currently restricted to customers living in Leicestershire, Nottinghamshire, Lincolnshire or Rutland or people who have been society members for five years or more).
It’s a similar story with fixed-rate bonds versus fixed-rate Isas: earlier this week you could get a one-year fixed-rate bond from Al Rayan Bank paying an expected 1.61%, but the best you could get from a one-year fixed-rate Isa was 1.21% from Castle Trust Bank. Meanwhile, Shawbrook Bank was offering an 18-month fixed-rate Isa paying 1.35%. However, with everything that’s going on at the moment, a lot of people won’t want to tie up their money even for a year.
“The way the market has moved over the years is that there are a lot more challenger banks outside the Isa market,” says Springall.
A halfway house between an easy-access Isa and a fixed-rate one is a notice Isa. With these, you must give a period of notice – typically between 30 and 180 days – before you are able to withdraw your funds. It means you are not locked in for a year or more. But the current rates on offer may not be tempting enough for some.
One possible argument in favour of a fixed rate is that while the Bank of England base rate has gone up three times during the past 12 months, climbing from 0.1% to 0.75%, most variable-rate savings accounts have either had only part of this passed on, or none of it.
If, over the years, you have accumulated a number of cash Isa accounts with various banks and building societies, now’s the time to check what rates you are getting. If they are particularly bad, consider moving to another provider.
Some people also argue that it’s easier to keep tabs on your cash if you consolidate several Isas into one account.
You can transfer your Isa(s) from one financial firm to another at any time and, if you want, move your savings from a cash Isa to a stocks and shares Isa, and vice versa.
When it comes to money invested in previous years, you can choose to transfer all or just part of your savings. But if you transfer an Isa you have paid into during the current tax year to a new provider, you must move the whole balance. To switch, contact the Isa provider you want to move to and fill out a transfer form. (If you withdraw the money without doing this, your savings could lose their tax-free status.)
However, you need to make sure the account you’d like to switch to accepts “transfers in” of existing Isa cash. Not all do: some are open only to new money. For example, the Marcus cash Isa doesn’t allow transfers in.
“Most of the good rates do accept transfers in,” says Springall.