ISAs vs interest-paying current accounts: which is best?
Deciding where to deposit your money can be a tricky decision, especially at a time when interest rates are hovering persistently at record low levels and the talk on the high street is of the financial benefits of ISAs. But recent legislation means that, from April 2016, the first £1,000 of interest earned per year by basic rate taxpayers will no longer be taxed (£500 a year for higher rate taxpayers), so keeping your cash in your current account won’t inflict financial penalties on you - a change that could be worth up to £200 a year.
Advantages of saving in an ISA
• Up to £15,240 can be saved in an ISA tax-free. To enjoy the maximum tax savings in a current account under the new £1,000 limit, you would need to save considerably more than this figure.
• If you choose to invest in a stocks and shares ISA, you could potentially enjoy far higher returns than in a current account. A significant rise in the stock market could result in returns of between 10% and 20%, if the right investments are chosen, wildly outstripping the interest a current account yields.
• Depending on your ability to manage a budget carefully, you may prefer to lock away your savings in an ISA which has to be separately accessed to obtain them. For some savers, retaining the money in a current account might tempt them to dip into it occasionally, for example to cover the cost of unexpected repairs or to purchase a ‘small treat’ after a hard week at work. Any spending will dramatically reduce the returns after 12 months.
• Children and young people can be encouraged to start saving in Junior ISAs, which is particularly important for creating a sense of responsibility for financial planning. Fewer products exist for children, with their current accounts often operating as pre-paid debit cards rather than interest-paying accounts.
• Most ISAs operate with no fees, unlike some current accounts. Even a nominal £5 monthly fee will hit your savings hard.
Advantages of saving in an interest-paying current account
• With interest rates low, the returns from cash ISAs – for savers who want to minimise their risk – are far lower than in previous years; rates are typically between 1% and 2% annually for cash ISAs at high street banks and building societies. By comparison, interest rates on current accounts can be as high as 5% from some providers, which makes them far more lucrative.
• Interest-paying current accounts can be held in joint names, so by combining salaries and savings in one account, couples could maximise their interest earnings.
• Some current accounts which pay interest on balances also offer a host of other benefits including cashback on purchases, discount cards, cinema tickets and insurance, which could help to save money in other areas too. However, terms and conditions must be adhered to carefully to ensure the full package of benefits is provided.
Making any financial decision is important, so if you are unsure where to deposit your savings for the highest returns, seeking independent financial advice is the most appropriate course of action to help you to make the most informed decision.
Click here to set up an ISA and Junior ISA with our trusted partners, Scottish Friendly.