Cash ISA or regular saver.

AlbertoBalsam

Hi guys,

I'm a basic rate tax payer and I've came accross a first homebuyer regular saving account from santander which pays 5% interest. The market leading cash isa is 3.5% with santander for existing customers.

In this instance do I benefit more taking out the savings account or the isa?

Lokolo

To work out the rate after 20% tax you should times the rate by 0.8.

So 5% after tax is 5*0.8 = 4%

lea123e

Hi There,

I opted for a Santander regular saver account which pays 6% interest, which even after tax was much better than the best rate ISA at the time. Unless theres something i'm missing??!

Sanzai

lea123e, I have found that in most cases where you have the full amount to save right from the start, it is best to put the money into an ISA first and then into a non-ISA account once you go past your allowance.

With your example, you have to realise that a regular saver account states the interest rate over a whole year, but have to account for tax and also for the fact that the interest is based on how much is in the account at any one time.

If you have £5100 right now, and are picking between an ISA at 3.5% and a regular saver account at 6% then the actual interest on the total in the regular savings account at the end of the year would be roughly half the stated interest rate if you put in equal monthly instalments.

Interest in 3.5% ISA from £5100 = £178.50
Interest from 6% regular savings account putting in £425 per month (so £5100 over a year) = 0.8x0.06x0.5x5100 = £122.40

The homebuyer regular savings account is a bit different becaue they allow you to put in a lump sum from the start which means you get the advertised interest (minus tax of course) on that amount for the whole year, plus the additional savings each month.

However, if you were being fair about comparing it directly with a cash ISA where you are limited to £5100 for this year, since the minimum to put into the homebuyer account is £100 per month, then you would be limited to putting in £4000 initially (with £1100 over the remaining 11 months).
Total interest with this would then be roughly: 0.8x0.05x4550 = £182

These are just approximations, since precise calculations are a little tedious and will vary based on tax you need to pay, specific conditions of the account, etc. However, you can see that even what seems to be a great offer for the homebuyer regular saver account is not exactly outstanding. At the end of it all, there would only be a few pounds of difference, and by keeping it in the ISA you benefit from tax-free savings for the future.

Hence, I stick to saving in a cash ISA first, and then if I'm lucky enough to have extra I put it into the 'best' non-ISA savings accounts avaialbe to me at the time.

ramjug

Hi have read it quite a lot and people confuses regular saving with any other account a lot. best way to compare is to half the regular saving account interest rate and then take another 20%(tax payer's) off and thats what we'll get after whole year.

BFM

ramjug wrote: »

Hi have read it quite a lot and people confuses regular saving with any other account a lot. best way to compare is to half the regular saving account interest rate and then take another 20%(tax payer's) off and thats what we'll get after whole year.

but you should also remember that you should also get some interest in the next best alternative for the money you didn't put into the regular saver yet to get a proper comparison