It has to be said, it’s more than a little embarrassing to witness the dregs served up by the current savings market, with so little available to match inflation.
Rates on fixed-rate bonds have become so low that you’ll barely scrape a return of 2% after tax – even if you commit to locking away your money until 2018.
So the Bank of England’s latest prediction that inflation will fall to its target of 2% within two years seems scant consolation right now, at a time when earning are growing at their slowest rate for over a decade.
ISAs or Fixed-Rate Bonds?
In the past, we’ve witnessed a reasonably close contest between bonds and ISAs, with bonds traditionally offering greater incentives for longer commitments, even accounting for tax. (See our guide: cash ISAs vs. fixed-rate bonds.)
But that balance has switched following the Government’s Funding for Lending Scheme, which has offered banks the funds they’ve needed and cut all competition for detail deposits.
Following the subsequent deterioration in returns for savers, the only hope of matching inflation through standard savings accounts is to lock away funds for five years in a tax-free ISA with Virgin Money (which at least allows inbound transfers), or holding at least £40,000 in deposits with First Direct.
Both of these accounts will return 3.00% tax free, though you’ll only be able to add £5,760 in this current tax year.
For instant access ISAs, we’re left with the Cheshire Building Society (2.30%), alongside its parent mutual, Nationwide, and the government-backed National Savings & Investments (NS&I), which both offer 2.25%.
The latter, supported by the Treasury, ensures that all savings are protected, rather than the £85,000 maximum compensation limit imposed on deposits in other banks through the Financial Services Compensation Scheme. (See our guide to secure savings and compensation.)
But that’s a mute point. The savings arm of the Treasury is exceeding its quotas, and though it’s made the respectable choice of automatically transferring old cash ISA savings from pitiful returns of 0.5% to its Direct ISA at a healthier 2.25%, it’s not allowing inbound transfers of existing nest eggs. (How do you transfer a cash ISA? Find out with our savings guide!)
NS&I: towards the top of the market for instant-access ISAs but won't allow inbound transfers.
Merits
As pointless as they may seem right now, there are still merits for savers to pursue the best products on the market.
Firstly, the difference between the top of the savings market and the bottom remains significant enough. Earlier this year, the Bank of England found that the average cash ISA rate without a bonus had fallen to just 0.88%.
So, as a measure of comparison, investing the full year’s tax-free cash allowance (£5,760) in the Cheshire account would yield £132.48 in interest after the first year, compared to this average rate, which would return only £50.69. It’s not a huge amount, by any means, but it’s something.
The advent of social lending (or peer-to-peer lending) has provided an alternative for savers who are prepared to take a degree of risk in the hope of higher returns.
But if you’re determined to stick to the tried and tested, it’s common sense to insulate yourself as much as possible from the rising cost of living.
Secondly, the tax-free allowance does not roll-over from one year to another. Any remaining unused allowance at the end of the tax year is lost for good.
So there’s merit in fulfilling as much of your tax-free allowance as possible so that you reap the benefits when economic recovery brings better conditions for savers. It’s very unlikely that there will be a chance to recoup that in the future.
Keith McDonald
Which4U Editor
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