Why Bother With Isas?

[sandyRoe]

I had a letter from my building society telling me how much I could put into an ISA. With interest rates so low why would anyone bother?

[237SJ]

I`m not sure. I think the banks do want to get a share of the ISA market. They would be stupid not to - not least because they they can give stupidly low % rates for savings accounts for ISAs whilst not advertising that actually, if you are a pensioner or other non tax payer, the rates are better.

[237SJ]

To clarify, I mean that the rates in other savings accounts are better than ISA rates

[jno]

Mr Micawber didn't know the pleasure of blowing your money on a Lamborghini

[sandyRoe]

He was a feckless ne'er-do-well who would have done just that if they were available.

[Gizmonster]

To be honest, I can't see rates rising anytime soon, irrespective of the changes to the allowances. A lot of people have already built up their ISA's, so the effect of the increase will be small, compared to what's already out there.
Also, the base rate has remained the same since March 2009, yet over the past 5 years, rates offered to savers have plummeted.
I remember a few years ago, I had the chance to fix at 3.5% for 2 years - I opted to fix for 1 year, as I thought rates couldn't go any lower. How wrong I was, 'cos the following year, the best I could get was 3%. Again I chose to fix for only 1 year and I got lucky, 'cos the following year, I managed to get a 3 year fix at 3%. That was last year and I can't add to that ISA and the best I found so far is a 2 year fix at 2.75%.
I'd like to say that they can't go any lower, but I've said that a few times before and been wrong :(

[hc4361]

ISA's are good for 40% tax payers otherwise there are better savings accounts out there - the Santander current account paying 5% up to £20k presently can't be beaten and each person can have 2 accounts.

[Gizmonster]

@ 237SJ >

Can you find a saving's account that offers 3.4%, 'cos that's the rate you'd need after paying 20% tax on it ??

[Gizmonster]

Santander pays 3% on balances from 3k - 20k
Nothing on anything up to 1k
1% on 1k - 2k
2% on 2k - 3k
.... so if you have say 5k in, the rate is not that good ... it's only 1.8%. The more money you have in, the better the effective rate, if you have 10k in, the effective rate is 2.4%. If you have 15k in, the effective rate is 2.6% and if you have 20k in, the effective rate is still only 2.7% .... and remember this is taxed .....

[hc4361]

I made a typo, it is indeed 3% on the Santander account. My mother is a non-tax payer and keeps £20,000 in hers. She receives £50 a month interest plus cashback for her council tax, gas/electric bill and phone bills. After the £2 a month fee she makes around £53 a month.

So the interest works out at £600 a year - which is exactly 3% per annum.

Explained in Martin Lewis website:
"If you've between £3,000 and £20,000 in it, you get 3% AER on the whole amount "
http://www.moneysavingexpert.com/savings/savings-accounts-best-interest#bestbuys

[New Judge]

I think you have the wrong end of the stick regarding Santander’s “321” current account, Giz.

Once you have £3k in the account you receive 3% (net) on the entire balance. It is not staged so that you get a lower rate on £1k-£2k and £2k-£3k as you suggest. In your example if you have £5k in the account you receive 3% on the entire £5k (£150 per annum before tax). Anyone considering opening one of these should also bear in mind that you have to have at least two Direct Debits set up from the account and pay in at least £500 per month.

Back to the question, ISA rates are currently disgraceful. The best flexible ISA rate I can see at the moment is about 1.5% and even a three year fixed ISA only pays about 2.25%. This is partly because of the low base rate and partly because of the Government’s quantitative easing (i.e. printing worthless money) and “funding for lending” schemes. The banks simply do not need depositers’ cash as they can get it more cheaply elsewhere.

One thing which should be borne in mind is that if you open an ISA in this current tax year (maximum is £5,760) the sum you put into it ring is fenced from tax on its interest forever (provided you don’t withdraw it). This means that should interest rates ever recover to a meaningful level you will be able to transfer it to an account that pays you more than it costs in postage to open it.

[factor-fiction]

Thanks, New Judge- I was beginning to feel I was a lone voice on this with my posts yesterday. The banks do not seem to need more depositors' cash so do not need to fight for the extra cash savers may be looking to invest in ISAs. Rates may edge downwards.

[whiskeryron]

Buy gold & find a loose floorboard.

[Gizmonster]

I stand corrected, I misunderstood the rates and tiers etc.
Admittedly, the 123 account is one of the best out there at the mo and with its cash back on certain direct debits, make it very competitive with ISAs. However, just remember that interest is taxed, so the effective rate drops to at least 2.4% (less if you're a higher rate tax payer). Plus, if you've got over 20k, you won't earn interest on the portion over 20k. Once you've invested the money into an ISA, it remains earning interest tax free for life, unless you draw it out, or unless the government change the rules ...... so when rates eventually go back up ..... quids in :)