Is a high interest current account like the Santander 123 account or Lloyds Club account better for your savings than a tax free ISA?
Lots of people know they “should” put savings in an ISA, even if they’re not sure why. At the moment papers are running more and more adverts and articles about filling your ISA allowance before the end of the tax year. You don’t get taxed on any interest you earn and you can now save £15,000 in one each year.
But I don’t think they’re necessarily the best choice.
Interest rates on savings aren’t great. In fact they’re really poor. As I write this, the best instant access New ISA (i.e. one where you can get money out whenever you want) is from the Post Office, and it has an interest rate of 1.5% AER (see our 9 Interest Basics for explanations of what terms like AER mean). Fixed rates aren’y much better.
If you had the full £15,000 to put into a New ISA, 1.5% would earn you £225 after one year.
Instead you could make an extra £339 (a total of £564) by putting that cash in a series of current accounts, presuming you pay 20% tax. The infographic below explains how it works, but read my full article on “current account stacking” for all the details.
(If you’re not sure why an ISA is different to a normal savings account, I’ve put together 9 ISA Basics to help cut through all the jargon).
It obviously depends on your circumstances, especially how much tax you pay. If like me you don’t have tens of thousands of pounds and need access to your savings, then right now the current accounts look the best bet.
Quick note on older ISAs
If you have ISAs from previous years, it’s worth checking what interest you are earning on them. If the rate has dropped (most accounts will), then you should think about transferring the money to another ISA with a better rate. You can move old ISAs each year without them taking up the new allowance as long as you don’t withdraw the money to then pay it in to the new ISA. Instead you need to fill in one of the bank’s transfer forms.
You could move older ISAs into a high paying current accounts, but if you have a decent amount of cash these current accounts limit what you can earn interest on. Santander’s is the highest at 3% on balances up to £20,000, but the others are much lower.
More on getting the most from your savings: