isa's vs Saving accounts/fixed term deposits

skyepark

HI

which are more beneficial at this moment in time? I notice that Isa's offer good interest rates but savings account offer better interest rates adn fixed term deposits even better ones. Does the fact that isa's are tax free mean they are in real terms more beneficial?

Aegis

The tax-free benefits of an ISA will essentially compount over the years, so if you're planning on saving for more than a year, the best paying ISA will usually top pretty much any other savings account you can name for a lump sum.

For regular saving, you might beat an ISA for the first year, but since you have a lump sum at maturity that you can't keep the regular saver rate on, you will start to slip behind the ISA in the long run.

This is what I've seen anyway, others may have different opinions.

Jonbvn

AFAIK, the best paying cash ISA will always beat the best paying "normal" savings accounts, when you consider net interest. However, if you are not a tax-payer then this would not be true.

baby_boomer

I agree with Jonbvn.

Fixed rate bonds are top payers at the moment because of the credit crunch related to the Northern Rock crisis. Banks and building societies want to guarantee that they hang onto savings for 1 year plus. This is because of their immediate needs, and a desire for security until we reach calmer waters.

Aegis

Most of the time I'd agree. There are a couple of regular savers I've seen that top an ISA for regular payments, but usually these come with other products attached that you then have to pay for.

A&L's 14% regular saver would probably blow most ISAs out of the water, but you have to pay more than you're likely to get in interest for the privilage of opening this account and getting life insurance as well.

A basic rate taxpayer would probably earn more with a regular saver at 8% than an ISA at 6%, but only for the first year. After that the missed ISA allowance would probably mean that you were lagging behind the tax-free route that you could have taken.

baby_boomer

Yes. Use it or lose it! (The annual cash ISA allowance)

Personal circumstances have to come into this. If you know you're going to use the cash for a house deposit next year or blow it on a holiday, then it is worth comparing ISAs with some of the regular savers.

But if you're going to hold your cash ISA for any length of time (especially to retirement) and also know you're going to add £3,600 pa each year, then Cash ISAs are always your first port of call - assuming you've originally made the right decision to save in cash.