ISA or Current Account?

Yes, you're better off putting the first £2500 into the current account while the promotional rate is in place.

But it depends on your profile really - if you had a lump sum to save of say £5100 (=next tax years cash ISA allowance) and you put it all in your current account you would net £122 in interest over a year (because you only get the good rate on half the money). If you put the same sum in your ISA you would get £166, or if you had a better ISA (@3.5%) then £178. But if you put £2500 into your current account and (£5100-2500) into your ISA you get £204.

So use the 'savings fountain' principle to get the best rates you can on the bits you can (just note that you have an extra tier at the top of your savings fountain).

When the good rate on the current account ends, then put it wherever else is best. This may well be an ISA.


More generally - ISAs have the benefit that tax free interest compounds (i.e. the interest you earned in year one can stay in the ISA, then during year 2 you are earning tax free interest on last years tax free interest, and on and on), so in the longer term ISAs get better and better (provided the interest rates keep pace).

The other main benefit of an ISA is that you can build up a large pool of tax-protected savings (by putting away your annual allowance each year). In times like these when ISA rates aren't great you might take a hit, but in ten years time when you're on a 55% income tax rate - you might be happy that you built up a £50,000 reserve which you get tax-free interest on. Of course, if you aren't a tax payer (and aren't likely to become one), then the benefits pale into insignificance.

But the bottom line is do the maths and do what's best for you

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