Why are Cash ISA rates almost the same as Regular Cash Saving rates?

XzavierWalnut

jimjames said:

XzavierWalnut said:

If you only have £20k then it's probably not worth putting money in an ISA. Different matter if you have a lot more money.
Also £20K @ 4.5% as an example is £900 interest, so you are not far off the £1k interest max without being taxed.

I'd suggest that would give the opposite conclusion. If you're close to hitting the limit of taxable interest then an ISA would definitely make sense as you won't need to worry about paying any tax especially if your savings are increasing and might go above next year.

I was a bit confused by your comment, but after reading it again, I don't think I explained myself very well. I meant if you only have £20k and no other savings and not likely to get anymore then there is probably not much point, as you will only get about £900 interest,
If you keep your £20,900 in the ISA then at some point you will go over the £1k limit so it is worth it.
Personally I am an advocate of ISAs and would be in a bit of bother if they ever get abolished.

TheBanker

Historically, cash ISAs were priced lower than equivelent non-ISA savings accounts, in part because it costs the bank more to administer ISAs - they have extra compliance requirements, extra HMRC reporting, and the need to administer the industry ISA Transfer systems. 

More recently, banks have faced increasing costs of wholesale funding, which is one of the reasons we've seen increased competition in the retail savings markets - it became a cheaper source of funds. This includes ISAs so banks have increased their rates to attract new deposits. For a bank, fixed term deposits are more valuable than instant access, because they know they have the funds for a specified period and they can (notionally) match fixed term savings to fixed term mortgage rates. 

ISAs themselves have also become more attractive to customers, as increasing interest rates mean more savers are using their personal savings allowance and therefore being liable to pay tax. This is particularly the case for higher rate tax payers who only have a £500 allowance. And there are more higher rate tax payers now due to the thresholds having been frozen for a few years. The increased customer interest in ISAs will mean the additional costs are shared between more customers, meaning the banks can offer slightly better rates.

surreysaver

XzavierWalnut said:

jimjames said:

XzavierWalnut said:

If you only have £20k then it's probably not worth putting money in an ISA. Different matter if you have a lot more money.
Also £20K @ 4.5% as an example is £900 interest, so you are not far off the £1k interest max without being taxed.

I'd suggest that would give the opposite conclusion. If you're close to hitting the limit of taxable interest then an ISA would definitely make sense as you won't need to worry about paying any tax especially if your savings are increasing and might go above next year.

I was a bit confused by your comment, but after reading it again, I don't think I explained myself very well. I meant if you only have £20k and no other savings and not likely to get anymore then there is probably not much point, as you will only get about £900 interest,
If you keep your £20,900 in the ISA then at some point you will go over the £1k limit so it is worth it.
Personally I am an advocate of ISAs and would be in a bit of bother if they ever get abolished.

That's the thing - protecting your interest from tax this year might not matter, but you'll also be protecting it from tax in future years, particularly if you'll be adding more money to the pot in the future.
The advent of flexible ISAs makes it more complicated. Its probably worth taking money out of higher interest savings, put them in a flexible ISA for a few days at the end of the tax year, then moving the money back again, just to protect the tax-free status of the money to give you the option to ISA the money again should that be the better option in the future 

Johnjdc

Albermarle said:

As said above, rates on cash ISAs are typically a little lower than non ISA accounts so for most people with small savings, non ISA makes sense

I think the point the OP was making ( and something I have also noticed) that in recent times ISA and non ISA rates have been very close, which was not always the case in the past. So they were wondering why it has changed .

I have a theory that this happens when rates are on a downward path, because the "gap" is partly due to banks not wanting to be as generous with a fixed rate that has a 'break clause' as all ISAs must, vs a fully locked in fixed account. When rates are expected to rise, the risk of people exercising that break clause is high. When they are forecast to fall, it's more remote.

jungleboy123

all - thanks for the helpful replies.

Yes, for some responses - i meant "regular savings" as in normal savings that either you would have easy access or fix for 1 year (not regular savings as paying £200 each month).

I have multiple ISA's now and i agree with some responses that it is getting complex to manage, but if i was to take it out i would easily go over the £1k limit. I guess i need to be combining ISAs and avoiding the penalty

Ocelot

It's obviously unusual for ISA rates to be comparable to non-ISA savings rates, but don't knock it - tax-free money is better than being taxed 40% on it (or even 20%).