Is it time to turn your back on Isas?

The tax-free choice for savers is losing its appeal with poor interest rates, but other accounts have drawbacks too, says Chiara Cavaglieri

Things usually pick up for savers in the run-up to a new tax year, but so far the cash individual savings account season has been a desperately disappointing affair. If you're waiting for the market to pick up, you could be waiting in vain, but should you really be looking at regular savings accounts instead?

There is no doubt that regular savings accounts offer, at first glance, heavyweight interest rates. The current best buys from First Direct and Marks & Spencer bank pay an appealing 6 per cent, while HSBC and Saffron Building Society follow with rates of 4 per cent apiece. Regular savings accounts can be a useful part of a saver's armoury. Not only do they encourage a disciplined approach to saving – you must typically save between £25 and £250 per month – but they can also work well if you drip feed cash from another savings account.

Turning to cash ISAs, there is really nothing to shout about. Top of the best-buy tables is the Select Access Cash ISA 2 from Britannia paying 1.75 per cent AER, but this must be operated by post or branch and only allows two penalty-free withdrawals each tax year. The variable National Savings & Investments Direct ISA also pays 1.75 per cent but the rate is due to drop to 1.50 per cent next week.

If you're willing to lock your money away, Britannia pays 1.85 per cent fixed until 30 January 2015 and 2.05 per cent fixed until 31 January 2016 (if you are not transferring in previous years' ISAs, you must deposit the full ISA allowance of £5,760). The Virgin E-ISA pays a more generous 2.4 per cent but you won't be able to access your savings until 24 January 2017, during which time rates could improve considerably.

Compared with even the best ISA rates, regular savings accounts paying 6 per cent sound too good to be true and of course, in many ways they are. The clue is in the name – you do earn impressive rates but only on monthly saving up to a specified limit (typically from £25 per month). It takes a long time to build up a decent pot of money from which to reap the benefits of the high interest rate.

Kevin Mountford, banking expert at, says: "Due to the fact you only deposit small sums on a monthly basis, the interest you will actually receive will be lower than advertised."

The First Direct account pays 6 per cent fixed for one year but only allows deposits of between £25 and £300 each month. Even if you were to put away the maximum each month, you only earn a full 12 months' interest at 6 per cent on the £300 you save in month one. By month two, you earn 6 per cent on £600 but only for 11 months and so on. Over the year, the total interest earned is actually £115 and that's before you lose a chunk to basic or higher rates of tax. If you were instead able to earn 6 per cent on a lump sum of £3,600 for a year, you would reap a far more appealing £216 after a year.

"In order to maximise the returns, it is best to open a market-leading savings account, hold your savings in this account and drip-feed the maximum deposit into the regular saver each month," says Mr Mountford.

As well as fairly misleading advertised rates, many of the best regular savers are restricted to existing customers. With First Direct, M&S and HSBC, you must be a bank account customer to open their respective regular savers and these current accounts have their own baggage (the M&S Premium Current Account costs £10 a month).

Most providers impose other conditions including penalties if you miss any monthly deposits or withdraw cash. For example, if you miss a payment or make a withdrawal from your First Direct regular saver, the account is closed and you earn a paltry 0.5 per cent interest instead. Most of these accounts are only good for one year, after which the interest falls away entirely.

If you look at the actual figures, the first port of call is still an ISA for the tax-free status.

Put away a lump sum of £3,000 (equivalent to £250 per month) in a fixed-rate ISA paying 1.85 per cent and you would earn £55 interest at the end of that year. Looking at the table of regular savers, only First Direct and M&S would get better results for a basic-rate taxpayer.

The perks with many of the top current accounts can't be ignored either. Nationwide's FlexDirect account pays 5 per cent on balances up to £2,500 for the first year and the Halifax current account offers an initial £100 switching bonus as well as a perk of £5 per month for every month that you deposit £750.

Jafar Hassan, personal finance expert at, says: "Luckily, current accounts are offering consumers a lifeline.

"With rates of up to 5 per cent, it's no surprise that savvy savers are turning their backs on ISAs."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents

Watch the spoof Thanksgiving segment filmed for Live!
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
boxingAll British heavyweight clash gets underway on Saturday night
i100 Charity collates series of videos that show acts of kindness to animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game