ISA or regular saver?

nos**tsherlock · 26 March 2013 at 1:21PM

I'm new to saving, and don't really understand how interest is calculated or paid on different types of accounts. Because of this, I'm confused as to what type of account I should be putting my monthly savings into. All over the website, unsurprisingly, with the tax year about to end, the advice is to put money into an ISA so that this year's allowance is not lost. I currently have a Santander ISA, paying 2.5% with around £3000 in it. I was wondering whether it would be better to continue paying my £200 a month into this account for the next tax year (the interest rate is for the next 12 months), or pay into a regular saver account offering 4%, then when the 12 month period for that account is up transfer the lump sum into my ISA?

I guess what I'm asking is whether I could be better of with the regular saver, even after the tax on the interest is deducted? I'm also supposing, perhaps incorrectly, that the interest on both accounts works in a similar way, i.e. that I will not get 4% of £2400, as I am not depositing the whole amount at the start of the term, but equally that this means that I would not be getting 2.5% of it in my ISA either?

I hope that all makes sense!

drjones · 26 March 2013 at 3:20PM

Interest is calculated daily (amount/100 * interest/365) and applied either monthly of annually. Monthly interest payment compound at a different rate to annual interest payments (with monthly payments, the amount on which the interest is calculated increases throughout the year).

Rates are compared between monthly and annual interest accounts using AER (annual equivalent rate). This tells you the rate of your interest you'd be earning if the interest compounded annually, regardless of whether or not an account pays monthly or annually.

So if you know the AER (rates are always quoted as AER), interest for one year = amount/100 * AER. Approx. interest for one month = amount/100 *AER/12 (actual amount varies slightly because of the number of days in the month).

Non-higher rate tax is 20%, so the AER of a savings account needs to be 20% higher than that of an ISA to return the same amount of interest per year. This means your 4% savings account, excluding other considerations such as ease of access, is better than your 2.5% ISA.

For a regular savings account, the interest over 1 year = the average balance of the account for that year/100 * AER. If you're paying in £200 a month, the average balance of the account = (start balance + 12*200) /2. You don't need to worry about interest compounding monthly, as you're using AER.

To work out the interest earned on your proposed regular saver:
2400/2 = 1200/100 *4 = £48 gross interest - 20% tax = £38.4 net interest.

If you carried on paying £200 per month in to the ISA.
(2400/2)/100*2.5 = £30 gross interest (on new money, ignoring other money already in the ISA).

J_i_m · 26 March 2013 at 8:07PM

I have both regular savers and ISAs.

My plan of action is to to deposit the maximum monthly amount permissable into my regular saver and to put any excess savings in the month into my isa until the subscription limit is met.

I do this because the regular saver will earn me more money in interest, but also the sooner you fill up your isa subscription then the more interest it will earn.

If I manage to fill my isa subscription before the end of the year, and I most likely will because I have a handy balance also sitting in a basic saving account as well waiting for the next financial year, then I'll leave my isa earning interest whilst I save into the basic saving account, and repeat the plan the next year.

innovate · 26 March 2013 at 11:22PM

If you would pay the same amount each month into either an ISA or a Reg Saver, all you need to do is compare the AER.

As long as the Reg Saver AER, minus 20% for tax, is higher than the IAS AER, the Reg Saver might win. I say "might" because the difference might not be worth it, and/or you might not want to give up your ISA allowance for the year (many Reg Savers lock your money up for 12 months).

Have you looked into ISA Reg Savers? Could be an alternative. Someone posted this the other day:

Nottingham Building Society have advised me that they will be launching a new regular saver ISA for 13/14 at 4%, with maximum payments of £480/month. I presume it will start on 5th April when the current one (5%) matures and I guess it will be called 'Starter ISA Issue 3'.

Also:

Buckinghamshire BS Chiltern Golden Nuggets Regular Saver ISA (issue 2) - 3.00%
Minimum operating deposit: £10. Min - Max monthly deposit: £10 - £470.
Operated via: Branch or Post.
Notes: Transfers in not accepted. One penalty-free withdrawal permitted per tax year. Monthly payment amount must be the same each month - but can be changed annually in April. Payments required each calendar month otherwise 0.1% interest is paid for the entire tax year.
Vernon BS also offer a Regular Saver ISA paying 3.00%. You must live within a 25 mile radius of Stockport to be eligible. See here.

MoneySaverLog · 26 March 2013 at 11:26PM

nos**tsherlock wrote: »

pay into a regular saver account offering 4%, then when the 12 month period for that account is up transfer the lump sum into my ISA?

This is what I'd do. There are better rates though. First Direct pay 6% on up to £300 a month for example.

nos**tsherlock · 27 March 2013 at 12:08AM

Thanks for all the advice / explanations.

The reason I'm with a 4% regular saver is that it is seriously flexible. I don't have to have a current account with them, with over a certain amount being paid in each month to qualify, and the minimum payment each month is not by standing order and can be a minimum of £1! So to a certain degree I can choose how and how much to pay. This acc is perfect for mopping up the excess that I want to save but can't fit into another regular saver I have with my bank. Didn't know about regular saver ISAs though, so thanks for that!

The only thing is, as I only opened this acc a few days ago, I'm worried that when the term ends next year I won't have enough time to transfer the money into my ISA. I think it should be OK, but I know it can take a while for an account to change over from the one with the good rate to the bog standard saver they give you when your 12 months are up! I think they say a maximum of five days, but not sure.

ISA or regular saver?

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