Cash ISAs offer glimmer of hope for suffering savers

Interest rates are low, but tax-efficient savings can still be made. Maryrose Fison reports

Everyone knows this is not a good time to be a saver.

According to financial information service Moneyfacts, the average deposit account is paying only 0.54 per cent. At that rate, it would take more than a century to turn £1,000 into £2,000; it's unlikely you will be able to wait that long. Against this backdrop of low rates, inflation is stubbornly high with the retail price index currently standing at 4.8 per cent. The consumer price index, which excludes housing costs, stands at 3.1 per cent. That's more than a percentage point above the Bank of England's own target which it is now expected not to meet until 2012.

So how do you make the most of your savings? Several options could put some wind into your saving sails. Instant access (sometimes called "easy access") cash ISAs are the safest, most tax-efficient option out there. But if you feel able to tie up your money for a few years, a fixed rate ISA or a short-term bond will usually offer a higher rate.

Nick Platt, the director of Henwood Court Financial Planning, says there is much to be gained from using an ISA allowance over a regular savings account. "With the annual cash ISA allowance recently increased to £5,100 this year, it takes only 10 years to put more than £50,000 into an ISA which, assuming a return of 3 per cent, will mean that £1,500 will be free of tax and not taken into account as the person's income," he says.

One such example is the flexible cash ISA from Santander and Alliance & Leicester. It's available to all adults aged 16 or above and pays a minimum of 3.2 per cent for one year. It is guaranteed to be at least 2.7 per cent above the base rate at all times. The minimum deposit is £1 and cash can be withdrawn at any point without fear of penalties. The only downside is the product is available only to current account customers of Santander or Alliance & Leicester.

However, not all banks and building societies offer deals exclusively to their own customers. Principality Building Society and Birmingham Midshires offer competitive products for both customers and non-customers. Principality's e-ISA, for example, has a 2.8 per cent variable rate, including a 1 per cent bonus for 12 months with a minimum deposit of £1. Birmingham Midshires' ISA Extra has a 2.7 per cent variable rate, including a 1 per cent bonus for 15 months and a minimum deposit requirement of £500.

But while the flexibility of withdrawals can give peace of mind, higher rates are on offer for those prepared to lock in their money for a bit longer. Take Halifax's fixed rate ISA saver, for example. For a minimum deposit of £500, it offers 4.25 per cent when money is locked in for four years, 3.35 per cent when locked in for three and 3 per cent over two years. Nationwide's one-year fixed rate ISA, by contrast, offers 2.5 per cent and has a minimum investment of £1.

If you've reached your cash ISA limit, there are attractive-looking interest rates to be had on bonds. However, it is worth remembering that, unlike ISAs, growth on bonds does get taxed and penalties for early withdrawals can be high.

Mr Platt says the key is finding a bond that will remain competitive for the duration of its term. "Provided investors can afford to tie up mony for a period of time, it is worth considering a one- to two-year term as the rate on interest is better than the instant access alternatives," he says. "We would not advise a term longer than this because if interest rates increase as predicted, then you could find you are locked into a bond that is yielding an uncompetitive rate of return."

On offer at the moment is ICICI's one-year HiSAVE fixed rate account paying 3 per cent requiring a minimum investment of £1,000. Santander is also offering a 15-month fixed rate bond with 3 per cent for investments over £1 and NatWest's one-year fixed rate bond pays 3 per cent on investments worth £50,000 or more.

The best medium-term bond on offer at the moment is from Lloyds three-year fixed rate bond which offers 3.75 per cent on investments worth £2,000 or more. And ICICI's three-year fixed-rate Super Saver bond earns 3.6 per cent on investments of at least £1,000.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

    £15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Loan Underwriter

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Recruitment Genius: Collections Agent

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive + incentives + uncapped comms: SThree:...

    Day In a Page

    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
    Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

    'A subversive brothel keeper and Communist'

    Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
    Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

    BBC heads to the Californian coast

    The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
    Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

    Victorian fraudster who shook the Bank of England

    Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
    Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

    Car hacking scandal

    Security designed to stop thieves hot-wiring almost every modern motor has been cracked
    10 best placemats

    Take your seat: 10 best placemats

    Protect your table and dine in style with a bold new accessory
    Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

    Cook not the only one to be caught in The Oval mindwarp

    Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
    Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

    Can Benitez get the best out of Bale?

    Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
    Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

    Beijing witnesses new stage in the Jess and Kat rivalry

    The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
    Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

    Jeremy Corbyn interview: A shrewd operator desperate for power

    His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
    Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

    Isis executes Palmyra antiquities chief

    Robert Fisk on the defender of the ancient city's past who was killed for protecting its future