Saving versus ISA account

ilovelife_2

Hello,
I have a question...and even the banks cannot give me a good explanation!

I have opened a savings account at Barclays. It says it gives you 6%AER-5.84 gross p.a. First of all, can someone explains this information? How would you explain this to a child?:A

Then why is that Golden ISA with 3.55% supposed to be better than the savings account with 5.84? I really don't understand. To me, even if the ISA is supposed to be better because it's tax free, the savings accounts looks like it gives you more even after taxes?

I would be very grateful if someone could give me more explanations...
:j

EarthBoy

ISA's are not always the best option, despite the tax advantages. You need to look at all the conditions of the account. In this case the monthly saver account pays a better rate of interest, 6%, but if you make any withdrawals you only get 3.03% for that month. The ISA pays less, but you get the same rate even if you make a withdrawal.

Paul_Herring

I have opened a savings account at Barclays. It says it gives you 6%AER-5.84 gross p.a. First of all, can someone explains this information? How would you explain this to a child?

Assume you put some money in and don't withdraw any.
It probably pays monthly, so after the first month, you get interest for one month on the money you had in there.
During the second month, you're not only earning interest on the money you put in, you're also earning money on the interest received for the first month.
3rd month, you'll be earning interest on the money you put in, the interest received for the first month, and the interest received for the second month.

The rate of interest you're getting each month is 1/12th of 5.84. The net effect (assuming no tax is deducted) is the same as just keeping the money in a 6% account that pays once a year.

Then why is that Golden ISA with 3.55% supposed to be better than the savings account with 5.84?

It isn't. At the moment. It's because interest rates are so low at the moment.

If interest rates start rising again, there may come a point where the rate you'll get on the ISA will be better than the net rate on an ordinary savings account. If you're just saving for the short term then the ISA probably isn't worth it.

However if that money's going to be in an ISA for quite a few years, you may lose out on the better ISA rates in future years for this year's contributions plus interest it earns in the interim.

bendix

ilovelife wrote: »

Hello,
I have a question...and even the banks cannot give me a good explanation!

I have opened a savings account at Barclays. It says it gives you 6%AER-5.84 gross p.a. First of all, can someone explains this information? How would you explain this to a child?:A

Then why is that Golden ISA with 3.55% supposed to be better than the savings account with 5.84? I really don't understand. To me, even if the ISA is supposed to be better because it's tax free, the savings accounts looks like it gives you more even after taxes?

I would be very grateful if someone could give me more explanations...
:j

There are a couple of issues here. Someone has already explained the issue around 6% and 5.84% adequately.

Regarding the comparison with the ISA. The particular Barclays savings account you are talking about is an account where you can only contribute a maximum of £250 per month for just this one year. At the end of the year, the account is effectively closed and transferred to a more normal account earning, perhaps, 0.5 or 1% or whatever the prevailing rate is.