3% ISA or an 8% savings account?

AFK_Matrix

I am soon going to need to setup a new ISA as current one has a rubbish rate. Now I was looking at using the Santander ISA at 3% which is obviously tax free. But I also saw the First Direct 8% saving account.

Now I am not sure how to work out which will pay out a better amount? The initial amount I will put in is £2000 and then around £280 a month will go into the account.

So which is better or should I do both and split the £280?

HeadAboveWater

First Direct has a limit of £3600 in one year (£300 per month).
Santander you've got the £5640 (?) limit of the ISA.

Just a matter then of working out which interest rate gives the most interest over the 12 months

AFK_Matrix

Yeah I understand the amounts that the accounts will take and I can work out the 3% amount but I am not sure how to work out the 8% one as it's taxed?

Sorry don't do a lot of tax calulations so not familiar with how to work it out.

edinburgher

By my calculation First Direct wins by just over £40 (£300/mth for a year vs £2k in the ISA and then £133/mth for a year).

Probably a wee bit more than this as well, as you can stick the £2k in an instant access account until it's all transferred into the regular saver.

innovate

You can use the MSE Regular Savings calc to figure out the returns

You'll see that you will earn more from the 8% Reg Saver after tax than in a 3% ISA. You'll even earn more from a 6% one. But clearly, there are advantages in having money in long-term tax-free shelters, so ISAs have their place too.

1. What you could do is have the existing ISA transferred (to get better interest, and to retain the tax-free wrapper)
2. save into Regular Saver, then at some stage put the money into an ISA as a lump sum.
   That "some stage" is preferably before the end of a tax year. But this would pre-req that you start the FD Reg Saver in March because it's a 12 month fixed term. The Nationwide 6% one has no withdrawal restrictions but only £250 max monthly.

So may be put £250 into the Nationwide 6% between now and March, and the other £30 straight into your ISA. Put whatever you have in Nationwide into your ISA before April 6 2013.

Then start an FD 8% one next March, ready to go into your (new) ISA in 2014 (stop paying into Nationwide).

Both FD and Nationwide Reg Savers have pre-reqs, but you should easily be able to meet those. Search the forum for info on them.

innovate

edinburgher wrote: »

Probably a wee bit more than this as well, as you can stick the £2k in an instant access account until it's all transferred into the regular saver.

I would only ever give up the tax-free status of any money when I need to spend it.

Also, in March/April/May time, the ISA rates are generally a lot better than they are now. The delta between Regular Saver and ISA then becomes negligable, or even negative for the Reg Saver.

AFK_Matrix

Guys thanks for the information and especially innovate!! That was awesome advice innovate and seems the best way forward as i didn't even know about the Nationwide account and I am already with them so that will hopefully help.

Pinner_Ram

Assuming you are a FD customer and so are eligible to open that account:

8% less BRT (20% assumed) = 6.4% net after tax pa (worth 4.8% to a HRT payer).

3% ISA, of course, remains 3% "after tax".

The interest will probably accrue on the balance on the account from day to day.

I would take out FDRS at 8% gross now, you say you can spare £280 pm, increase to £300pm if/when you can, on maturity in a year's time pay proceeds into the best ISA you can find then.

In the meantime put your lump sum into the best ISA deal at the moment.

Beware best rates versus customer service, from experience I would not touch Santander.

Simples!

PR

thenudeone

The 3% is directly comparable to 6.4% for a basic rate taxpayer or 4.8% for a 40% taxpayer.
6.4% is more than twice as good as 3%
Don't get side-tracked by the fact that a regular saver only allows a limited deposit each month.
If you have a lump sum to invest, you can still deposit the rest in an instant access account and drip feed it into the regular saver.

In all cases in every type of account you'll received interest for the balance on each day (even if it's only added to the account once a year).

But whilst the 8% account could be withdrawn next week, the ISA will be tax free forever; the ISA market is competitive; and you can always move the ISA to a better interest account if the ISA rate drops.

I'd certainly put the max. you can in the 8% account now, then decide in March or April whether to move it to an ISA.

AFK_Matrix

Thanks again guys

Thinking about it I think what I will do is open up the Santander ISA, I have a current account with them and so far so good with them. And then put the £2000 in the isa.

Then I will do the FD regular savers, will have to get their 1st account though as I have no account with them. I will probably actually be able to put £300 a month in and will do this for a year and then put this in the isa. I may have extra income over the £300 so this can go into the isa.

Freecall

But surely the whole point of an ISA is that it is forever (ignoring legislative risk), you get the benefit over and over again.