Savings: ISA @ 3.2% vs HSBC Regular Savings A/c @ 8% AER

Curious_Yellow_2

Hi all, long time lurker, first time poster looking for some help.

I've got some cash to save and am looking to save it regularly. I've done my calculations and if I were to save £200 monthly in an ISA at 3.2% then I'd deposit £2400 in total and make £2,441.40 according to the MSE ISA calculator. Now, using the 8% AER regular saver account my bank provides me with for the same deposit amount over the same time provides approx £2504 according to the calculators I've found on the internet on the askfinancially site. Even allowing for 20% tax this still works out to provide a better rate of interest than the ISA.

What I'd like to know is, have I worked this out correctly? If I have then why do people always say an ISA is the best way to save money when products like this exist. I'm quite confused.

Appreciate any advice you guys give me.
Thanks.

opinions4u

An ISA lasts longer than a 12 month term on a regular savings account.

Clearly 6.4% net is better than 3.2% tax free in the short term though.

If you are simply comparing the best place to put the monthly savings amount, the First Direct non-ISA is better. The key question comes on maturity. Do you leave the lump sum to rot away in an account paying 0.1%, or do you then pay it as a lump sum in to a competitively priced ISA, very possibly using up part of your allowance for the 2012/2013.

Stochasticity

Curious_Yellow wrote: »

Hi all, long time lurker, first time poster looking for some help.

I've got some cash to save and am looking to save it regularly. I've done my calculations and if I were to save £200 monthly in an ISA at 3.2% then I'd deposit £2400 in total and make £2,441.40 according to the MSE ISA calculator. Now, using the 8% AER regular saver account my bank provides me with for the same deposit amount over the same time provides approx £2504 according to the calculators I've found on the internet on the askfinancially site. Even allowing for 20% tax this still works out to provide a better rate of interest than the ISA.

What I'd like to know is, have I worked this out correctly? If I have then why do people always say an ISA is the best way to save money when products like this exist. I'm quite confused.

Appreciate any advice you guys give me.
Thanks.

Yup, the numbers are about right give or take a pound or two.

And yes, 8% gross is 6.4% net for a basic rate taxpayer (4.8% net for a higher rate taxpayer and 4% net for a top rate taxpayer) and beats 3.2% in an ISA hands down. 8% is by far the best rate available anywhere.

But there are advantages to an ISA: once a money is in an ISA, you don't have to pay any tax on the interest whatsoever for as long as you live and don't withdraw it. You can also convert cash ISAs into stocks and shares ISAs at a later date.

Whether or not those benefits are enough to compensate for less interest depends on your personal circumstances. If you have no other savings and can only put aside £200 a month, then a regular saver probably is the right product for you, at least initially.

Curious_Yellow_2

Thanks very much both of you. You've helped me make a good decision for my situation!

I will keep the points re the ISA once the term of the savings account is over in mind. I've put the date the account ends in my diary and will swap them over accordingly.