Better than an ISA?

vin_rouge_3

I've just opened the A&L Premier Direct Current Account - very happy so far. I also opened the 10% saver account. Can someone clarify this for me...
If the savings account is paying 10% albeit gross, and the best ISAs are currently about 5.2% gross, surely even though you end up paying tax on the interest, the savings account is performing better - even on a high tax bracket of 40%, you'd still get c. 6% net on the savings account.

If this is not the case, please let me know!

p.s. Curiously the 10% savings account is even done out to look like an ISA in its having a limit of £3000 a year.

innovate

If you have £3K to put into an ISA as a lumpsum, the 5.2% A&L ISA (and probably some other ISAs) easily beats the 10% regular saver, even for a basic rate tax payer (and even if you consider that there is a £25 penalty for transferring the A&L ISA should you want to do that)

If you can only pay £250/month into a savings account, then the 10% regular saver is marginally (approx £10) better for a higher rate tax payer, and certainly a better option (approx £40) for a basic rate payer. Especially since you can do whatever you like with the regular saver funds at the end of the 12 months, without any penalty.

Key points to remember, however, is that you can put max £250/month into the regular saver, and that the timescales of regular saver and ISA don't necessarily match - ISAs run from April 6 to April 5, a regular saver runs for 12 months from day of opening.

I believe the A&L regular saver opening date is the date when you first pay into it. So the max you can pay into it this tax year is roughly 3 months if you start paying now = £750, and max for next tax year is £2,250 if you do. Both these amounts are below your annual ISA allowance. Of course you could wait until April 6 with your first payment, and then be able to pay £3,000 in during the next tax year.

The ideal is to exhaust your ISA allwances with lumpsums, and have the regular saver running alongside your ISA(s).

tomstickland

If you have a 5.2% ISA then it pays 5.2%.
If you have £3K sat in a 5% account and move it £250 per month into a 10% account then your gross interest is approx 7.5%. After tax at 20% then this becomes 6% which is better than a 5.2% ISA.
That's how I see it.

innovate

The principle is true, tomstickland, but there are a couple of big "ifs" in your scenario.

• if you have £3K readily available
• if you can transfer the monthly payments without loss of interest (payment must be made from an A&L current account - the 5% interest on this account only goes up to £2,500, and you must pay min £500 into the current account each month - so some transferring of money is very likely required. Loading £3K into the current account in one go doesn't look a good idea )

then yes, for a basic rate payer this would work out about £70 better than a 5.2% ISA, and for a higher rate payer about £55 (if my maths this time of night is correct )

As an aside: I just read in the T&Cs that the monthly payments into the regular saver must be the same for all 12 months.

lipidicman

Dont forget that if you take up the regular saver rather than paying into your ISA you could be missing out on the benefits of tax free interest for many years. For me this tips the balance. I pay into the ISA first, then do my regular savings. In fact one of my regular savers is timed to pay out for the new tax year to form my ISA deposit.

grumbler

Exhaustive mathematical consideration can be found here: when a regular saver is worth it: ...

innovate

Thanks, grumbler - I had forgotten about that sophisticated thread!

Having typed everything into a spreadsheet, I need to now revise my late night calculations significantly downwards:

If you had £3K in a 4.8% interest account, and drip-fed this into the 10% regular saver, you would be

• as a basic rate tax payer: £23.96 better off
• as a higher rate payer: £21.03 worse off

in 12 months time than if you put the £3K in one go into a 5.2% ISA. So hardly anything in it, even for the basic rate payer.

Add to that the transfer/control efforts required for the regular saver, and the very important point lipidicman made about future years' interest taxation: IMHO, the ISA wins in the "transfer" scenario.

As I said in my first response, doing both, an ISA and a Regular Saver, is doubtlessly the most desirable action :cool:

lindabea

Hello Innovate - do you have trouble sleeping? You must be very keen to start working out these type of calculations at 1:36AM. Any way, I am most impressed with your knowledge. By the way, excuse my ignorance - but what does PM mean when you said "PM me" in one of your entries.

grumbler

lindabea wrote:

...what does PM mean ...

Private Messaging (Guide)

tomstickland

I'd always use my ISA allowance first, since it then sits their tax free for the following years.

lindabea

Grumbler - Thank you very much for explaining about the private messaging. I had no idea that you can do that. Very useful feature.