Cash ISAs - are the rates worth it?

Lokolo

I fixed in January. 1 year at 4.2% and 2 year at 3.5% (which I missed out on 3.8% by a few days).

Arthurian

Lokolo wrote: »

Ah don't be so pessismistic! You might!

We might all be higher-rate taxpayers after the election next year. Doesn't mean we'll be earning much, though!

Milarky

Lokolo wrote: »

You have to think longer term.

Yes in the shorterm you have the option to put the £10k in a better paying account. But what happens if in 2 years you can get a better ISA than general savings account? You can't put that £10k back into ISA because there are limits.

Then what?

The bit in bold is questionable. Without benefit of survey evidence, I would hazard that ISAs have always (and will always, therefore) offered lower rates gross than comparable taxable accounts. The logic is simple, provided the 'net' rate is still slightly greater, people will plough in because (in exchange for all that inflexibility and not being able to move your money effortlessly) they still save something extra. But banks, having spotted a certain 'inelasticity' associated with the ISA market have started to milk it and will now be systematically offering ISAs with no net (of tax) difference.

The arguments for keeping your ISAs at all costs are slipping as I see it. What if Cameron does scrap tax (for basic rate taxpayers - about 80% of us) on savings? What about the increased allowances of £5100 from next year? How many among the population can save £5100 a year?

All I'm saying is that ISAs are all too often accepted as a 'plus' without question - whereas the disappointing experience of rates has shown that they have never fulfilled their promise (which would be to offer the same gross rates as taxable accounts with comparable notice terms etc) They haven't, and therefore they won't and people have to be aware of that.

As to whether rates for all accounts will slide if Cameron does take the tax off - I think that's more than likely. But then where would that leave ISA balances that folks have built up?

apt

Assuming they get a majority (and that's not certain as many people have doubts about them) Cameron and Osborne might call ISAs something else and fiddle around at the margins as Brown did when changing from Tessas and Peps, but they won't shift away from tax free savings accounts as it will cost too many votes. Good cash ISA accounts do come along - e.g. Natwest/RBS last autumn, Newcastle BS, First Direct this year. It's up to savers to grab the good offers when they are available.

Masomnia

A lot of means tested benefits don't take into account income from ISAs. Also, if you're approaching retirement, recieving income from a cash ISA won't count towards your income for income tax purposes, which could be advantageous given that the personal allowance is higher.

Milarky

Masomnia wrote: »

A lot of means tested benefits don't take into account income from ISAs.

Not 'a lot', just the 'tax credits' (Working Tax Credit and Child Tax Credit) which are particularly generous in the treatment of capital (which is ignored) and income (which is ignored if it sits in an ISA) This makes ISAs the first port for people in receipt of these - compared to other forms of savings

e.g. £3600 in ISA at 2.5% gross v 4% net

4% gets reduced by 20% tax plus 39% lost of tax credit i.e. worth only 1.64%

However pension contributions (compared to ordinary savings) are effectively 'capital-boosted' by the 'restoration' of tax credit

e.g £3600 into pension: 'Direct' net cost is £2880 (£720 tax relief on tax) but '£3600' into a pension also boosts tax credit payment by £1404 (39%). As you can see this effectively doubles the value of any pension because £1476 is the 'net' cost for £3600

This makes pensions a much better way to save for many people than simply saving to an ISA (including S&S ISAs invested the same way as the pension)

LongTermLurker

The_Enforcer wrote: »

I'd be interested to know what the equivalent fixed savings account options were around that time (I can't remember as I only had enough spare to fund an ISA at that time), though, to provide a more relevant comparison?

At the peak before the banking crisis, 1 year FTDs reached about 7.2% gross iirc, under 2 of Baldur's comparisons. I agree though, it's unusual for cash ISAs to offer such high rates. Of course, for high rate taxpayers they will continue to be of benefit.

Following on from Masomnia's post, they also simplify things a hell of a lot - they don't have to be declared on tax returns and may even keep you below the 40% threshold. Financially, a basic rate taxpayer needs to look a lot further forward to see the real benefits, which become clearer when you have a bigger pot of ISAs to consider.

Primrose

If you are planning to subscribe to ISAs for a considerable number of years, you will build up a nice tax-free sum. Interest rates won't stay low for ever and there's no guarantee that taxes generally (and on savings) won't rise. Your ISA annual allowance is a question of 'use it or lose it'. As somebody has pointed out, if you can afford to tie up the money for the longer term, fixed rate ISAs provide a higher interest rate. If you are looking really long term and thinking about retirement, after April next year you won't be able to withdraw the tax free cash sum from your pension scheme until the age of 55 (it's currently 50) so having a nice cash ISA nest egg tucked away for your later working years could provide a more flexible option for having some cash if you were to be unemployed, made redundant or had a health problem and were unable to work yet be too young to draw your pension benefits. And of course, one day you might be a higher rate taxpayer and then having tax free savings would be reallhy worthwhile.