Santander 123 - alternative to ISA?

jamiednm

I've been looking at ISAs and current accounts this morning, and something about Santander is puzzling me (I must be missing something simple here)!

If I keep £10,000 in a 123 current account, then I should get 3% (2.8% gross) interest on that (£280 per year in interest).

If I keep £10,000 in Santanders 2 year fixed ISA, I only get 2.3% gross (£230 per year in interest).

Is that right, and if so, why bother with the ISA?

Thanks

innovate

You are right, there are presently some current accounts that pay a basic rate tax payer more interest than a cash ISA would. For higher rate tax payers it is quite different. Also, some people prefer to build up a large cash ISA balance. It is quite conceivable that at some stage in the future, cash ISA rates will be significantly better than current account rates. Or some people who are basic rate tax payers now might be higher rate tax payers in the future.

One possible option is to save up your ISA money in a current account that pays "decent" interest, and then deposit the lot into an ISA just before the tax year ends.

jamiednm

innovate wrote: »

You are right, there are presently some current accounts that pay a basic rate tax payer more interest than a cash ISA would. For higher rate tax payers it is quite different. Also, some people prefer to build up a large cash ISA balance. It is quite conceivable that at some stage in the future, cash ISA rates will be significantly better than current account rates. Or some people who are basic rate tax payers now might be higher rate tax payers in the future.

One possible option is to save up your ISA money in a current account that pays "decent" interest, and then deposit the lot into an ISA just before the tax year ends.

Ah yes of course, so if I transferred £10k out of an ISA in to a current account and wanted to start a new ISA next year, I'd have to start again at approx. £5,700, rather than adding to that £10k, potentially having a lot of my money missing out on better ISA rates in the future...

bowlhead99

The issue is that whether you might get 3% or 2.8% gross on new money into a 123 account, most people are taxpayers and so will lose a fifth, two fifths or even three fifths of new income earned, to the taxman - depending on their personal tax status- by the time they've had a bit deducted at source by the bank and then done a tax return at the end of the year.

On ISAs there's no tax to pay and so the gross rate is yours to keep for yourself. This means banks can afford to be currently paying lower gross on such accounts because they know people value the tax free status.

Also they are using high interest current accounts as loss leaders to hook customers in for a lifetime of cross-selling opportunities, while charging nominal fees (together with enforcing minimum monthly throughput levels) to try and deter non-customers from using them as savings accounts (as smart people like Innovate would do).

So with some institutions there is a bit of an abnormality in some current account rates vs the same bank's ISA rates at the moment, which may or may not last a while.

The thing about ISAs is that you only have a limited amount of new money that can be put into an ISA wrapper each year and if you don't use this allowance, you lose it forever. If you expect to be able to fill your allowance in future years out of future income, then if you don't use this year's allowance you are potentially resigning yourself to the fact that this year's money will have to stay outside the ISA wrapper forever.

By taking that approach, in pursuit of a slightly better net result this year, you might be missing the opportunity to save tax on your interest income from the 5k or 10k or whatever for the next thirty years or more.

As Innovate suggests, one approach is to try to get the best net result from any source throughout the year and only commit it into an ISA (for the 'use it or lose it' issue) in the last week of the tax year. If you could get a better, instant access, net result somewhere else, you definitely wouldn't want to lock it away in an ISA just yet; because on that amount of money you couldn't withdraw it from the ISA and then re-deposit it later - due to only having a limited annual allowance.

If the 10k is already ISA-wrapped I would be very reluctant to unwrap it just to get a few quid extra on an account like 123.

AndyPK

jamiednm wrote: »

If I keep £10,000 in a 123 current account, then I should get 3% (2.8% gross) interest on that (£280 per year in interest).

It's that 3% gross.

£237 interest net.

psychic_teabag

Isn't that £240 after basic rate tax, from which you also need to deduct the £24 annual fee. But there is also the opportunity to get cashback on bills.

Vital_Spark

Oh dear....I am reading this and understanding nothing...

MY head was never created to understand finance...anything to do with figures, actually.

Think I should open my own thread and ask questions in simple form hoping for simple responses (you know, designed for idiots )

innovate

May be do a bit more reading before deciding on the questions you should ask?

davidqu

I'm genuinely thinking of opening a 123 account solely on the fact it's paying 3% interest, I have a bond maturing very soon and Santander pay 3% on balances up to 20k which would be the amount i would be looking to deposit. I can't find any 1year-2year bond that will pay anything close to that.

Does anybody on here use 123 solely for 'savings'

blinko

3% will generate 2.4% for a basic rate tax payer, either way 2.4% sucks HUGELY as a return on an investment

But yes to the OP some current accounts are yielding higher than an ISA

davidqu

blinko wrote: »

3% will generate 2.4% for a basic rate tax payer, either way 2.4% sucks HUGELY as a return on an investment

But yes to the OP some current accounts are yielding higher than an ISA

Do you mind if I ask

Where would I gain more interest on 25k, I'm searching all over the net and can't find much