why always ISAs??????

scrazz

i have one niggly question which i'm sure will be answered in minutes...

this site always recommends sticking your first £3000 of a year in an isa.

but some regular saver accounts pay more than some isas, even after tax. so surely that is a better answer if it is a situation which suits? eg. a basic rate tax payer would be better putting £250 a month into a 7% regular saver than the same every month into a 5% isa. the theory being 7% - 20% is 5.6%

am i right or am i showing my naivety?

ManAtHome

Advantage of ISAs is longer-term - most high rate regular savers work for around a year then they're gone. An ISA should remain tax-free for many years (obviously at the whim of current and future chancellors). Of course the ideal is to do both, but if you're looking for short-term savings the regular savings may well be the one to go for.

ReportInvestor

Hi scrazz and welcome to the forum .

It's a fair question to raise. As MatH suggests, you are right in the short term - if you were using the account to save up for a car or holiday, for instance.

But it's a "use it or lose it" thing. You cannot add to a 2006/7 ISA after April 5th 2007 even if you have opened one with less than £3K.

£3K mini-cash ISAs may be abolished in 2010 (or be reduced to £1K). So potentially you are buying a 1.2% interest boost for life - assuming 5% savings rates and 20% basic rate savings tax - if you leave your money in.

Over 40 years that equates to over 60% = £1,834 on a £3K ISA. You are locking yourself into higher compound interest rates over time.

And the regular savers may have nearly all evaporated in a year's time so you'd have the hassle of starting all over again.

But perhaps posters need to make reference to the time scale when they recommend the merits of cash ISAs over regular savers. Perhaps it indicates how strong is Martin's hold over site members - via the "Savings Fountain" article which was written when regular savers were good, but not this good :j .

EagerLearner

Thanks for the question Scrazz - I have often thought the same. However, an ISA has always seemed better for me personally as it's instant access and tax free - whereas the high rate regular saver may pay more, but is locked in for a year... however, the 12% Alliance & Leicester account is making me think long and hard about this he he!

steve_cov

If you use a regular saver account, you put in a set amount per month to benefit from the high interest rate. With an ISA, you can deposit the whole amount in one go and the whole amount benefits immediately.

If you put £3000 into an ISA, you get 5.2% (or whatever) tax-free on the whole sum for the whole year. The same amount in a regular saver account will benefit only on a drip-drip basis.

The average contents of your account over the tax year will be half of the total (£1500), so a taxpayer would need to have an interest rate of double the ISA's rate, plus the tax take, to be better off. If you can get 5.2% in an ISA, you would need to be getting 13% gross in a regular saver to receive the equivalent interest.

ReportInvestor

But is there anyone on these boards who would be earning 0% on the money not invested in a regular saver for the first 11 months of the year .