Savings account or ISA?

Zingara

Please help, very confused! I'm looking at getting my savings started up again following a lot of recent spending. I will be saving a minimum of £100 a month, currently don't have an ISA and only a fairly low interest savings account with Lloyds (and not much money in there!).

I can get a rate of 8% for 2 years with the Lloyds Monthly saver account but would I be better taking out an ISA as they are tax free? The 8% rate seems to good to miss if I'm honest but I can't work out whether it is the better option when taking tax into account. After the two years the interest rate drops but I can always put it elsewhere then.

Thanks,

Karen

SeanW

Assuming you pay basic rate tax, at the end of the first year:

ISA at 6.1% (assumes this is the rate for the year) would be worth £1235
Regular saver at 8 % would be worth £1240

At the end of the second year:

ISA remaining at 6.1% would be worth £2550
Regular saver at 8% would be worth £2560

This assumes my calculations are correct!

You need to consider the tax benefit if you left that money in the ISA though, it would soon make up that £10 over the rest of your working life.

The ISA rate will probably change over the next two years, for better or worse, so it's difficult to say whether 8% remains good. It assumes 8% is actually 6.4% after tax. It assumes months are all equal, and you pay the money in on the first of each.

My figures do not match LLoyds TSB's calculator for 2 reasons:

1) They assume you don't pay tax.
2) It may apportion between months better. However, it's quite far out.

Justin_R

If you are thinking of saving anything between £100-250, my advice would definetely be to open up an ISA account.

After speaking with a financial guru from our family, he had instructed me that this was the best way forward. The tax free element is just the most amazing thing.

The ISA account will always follow the interest rates. A sudden drop or lowering in interest rates, even for the mid-term, does not look likely and add to that the reluctance of the major banks to pass on hikes in the bank of englands interest rates on to their savings products - makes sense to go with the ISA's.

I just think with ISA's we know exactly what we're getting and for me it's the best thing on the market for a saving account where you would want to save around about 100-200 pounds every month!

Jake'sGran

Put it in an ISA. There are some good rates available at the moment. On working lunch the other day they recommended the National Savings one. Its easy access which is what you need. Don't go for one with strings. Somewhere on this site there will be a table showing the best ISA rates.

The calculations given by SeanW are incorrect. In a regular saver account you would not get

12 x 100 x 8%

...they don't work like that and I think some people are being taken in by them. The first month you would get £100 x 8%divided by 12 (£100.66p), the second month it would be £200 plus the interest earned on the first month and then plus 8% divided by 12 x 2. Hope this is clear. I took one out last year and suddenly realised that I would not get the high rate advertised so I cancelled it.

SeanW

Jake'sGran wrote:

The calculations given by SeanW are incorrect. In a regular saver account you would not get

12 x 100 x 8%

...they don't work like that and I think some people are being taken in by them. The first month you would get £100 x 8%divided by 12 (£100.66p), the second month it would be £200 plus the interest earned on the first month and then plus 8% divided by 12 x 2. Hope this is clear. I took one out last year and suddenly realised that I would not get the high rate advertised so I cancelled it.

Hmm.

I haven't done 12 * 100 * 8%, that would mean £96 in the first year.
Nor have i made the mistake of compounding interest like you have.

Here is how I derived my figure:

£100 per month.
month 1's £100 makes (8%/12) * 0.8 interest * 12 (in there 12 months)
month 2's £100 makes (8%/12) * 0.8 * 11 (in there 11 months)

8% = regular saver rate
0.8 = multiplier to take off tax
12 = months in a year

What this equates to is £100 * noOfMonths * (yearlyRate / 12 ) * 0.8

Which is (12+11+10+9+8+7+6+5+4+3+2+1) * (0.08/12) * 0.8 = £41.60 interest

This only works for 12 months because banks will compound the interest yearly.

If you are interested:

12+11+10+9+8+7+6+5+4+3+2+1
= ( 12 * ( 2*1 + (12-1)*1) / 2 )
= ( 12 * ( 2 + 11) /2 )
= 78

For the purposes of this discussion, we are talking regular saver versus regular saver, the only difference is the fact that the ISA is tax free. (It wouldn't incur a maximum per month other than £3000 a year, but the poster didn't specify over £250).

Had the original poster said they had £1200 to save, should they drip feed £100 from under their matress or put their £1200 in the ISA, the ISA would have perhaps made more sense.

Purely based on 2 years, the regular saver is marginally better than the ISA based on today's rate, which is all I can base it on.