ISAís or current accounts; which are the superior saving medium?
Whilst the Bank of Englandís decision to hold its base interest rate at 0.5% for nearly 5 years has been welcomed by those who have been struggling to cope with the rising cost of living in the UK, it has nevertheless created a torrid landscape for the aspiring savers of the country, who have found it increasingly difficult to find an ISA deal from providers which comes with a competitive interest rate.
Whilst much has been made of the official introduction of the NISAís last month, and the increased £15,000 tax free allowance that has come along with them, the reality is that interest rates being paid on deals involving these are so uncompetitive, that the threshold rise isnít particularly beneficial to aiding the cause of those who want to begin saving meaningful amounts of money.
Conversely, current accounts in the UK have evolved dramatically over the past few years, and have now materialised across the market in new hybrid forms which can serve as both a standard cash account and a saving account. Moreover, the interest rates paid on these new current accounts have generally been higher than their tax-free counterparts, and unlike ISAís, there is no limit to the number of these current accounts that you can hold in a year.
The apparent strength of these new current account offerings has spurred a compelling and important question; are current accounts now the superior medium to save with and do they provide high enough returns to outstrip the tax-free advantage that comes along with interest garnered from ISAís?
Identify your motives for saving
The first thing to keep in mind when contemplating whether to use a current account or an ISA for your saving purposes is the precise reasons behind your intent to begin putting money away in the first place. If you want to ensure that your capital gains from stocks and shares are left untouched by the taxman, then it is advised that you look at the new NISAís, because the new £15,000 allowance means you can save yourself a lot each year by utilising these accounts to protect your investment earnings. Furthermore, if you are simply looking to acquire a flexible and simple account, which you solely want to use for savings, then you might want to consider a NISA as well because the new hybrid current accounts often come with an assortment of strict terms and conditions which must be abided by.
The other point you will need to consider is whether you earn enough money to make regular payments into an account each month. This is because unlike ISAís, many of the new hybrid current accounts come with fixed monthly deposit requirements, meaning you will most likely have to be prepared to put anywhere between £2 to £1000 each month in order to qualify to use them.
However, if you are seeking to obtain the highest possible return from your cash savings and you are happy to be bound to a set of rules in order to achieve this maximisation, then one of the new current accounts should be considered because you stand to obtain more from a financial perspective by utilising these mediums.
Current accounts for cash savings
Whilst the new £15,000 allowance means that you can save a considerable amount more than in the past with ISAís, the torrid complexion of interest rates that are attached to them at present means that you will almost certainly obtain more from using a hybrid current account, providing you find the right deal.
A key point to remember when searching around the market for the most beneficial deal is that you will need to find a current account with an interest rate that pays higher returns after tax than the best ISA offering on the market at present. For basic rate and top rate tax contributors, this means:
Basic-rate taxpayer (20%) ñ Finding a current account which pays over 2.2% interest a year.
Top-rate taxpayer (40%) ñ Finding a current account which pays over 2.9%.
Of the deals on the market at present, both taxpayer groups can achieve this aim by looking at the Santander 123 Current Account, which currently returns 3% on interest each year on balances between £3,000 and £20,000. You will have to put a minimum of £500 each month into the account in order to keep the interest facility and make a payment of £2 per month as an account charge. You will also have to set up at least two direct debits in order to qualify for the rate, which might deter certain groups of people from using it.
For more dramatic returns, savers could also look at the new Nationwide Flex Direct account and TSBís Classic Plus account, which both pay 5% interest on balances up to £2,500 and £2,000 respectively. However, Nationwideís deal necessitates that you have to put at least £1,000 into the account each month in order to qualify for the interest deal, and the amount of interest you get paid on declines after your initial year. Similarly, TSBís deal requires that you pay at least £500 each month, and there are other requirements that might also deter your use of it.
There are also deals on offer from the Yorkshire Bank, Halifax and Tesco Bank which are worth considering, though none pay interest on as high balances as Santanderís 123 account.
However, for individuals who are seeking to save more than £3000, an ISA may need to be considered. Alternatively, using a multiple account strategy in order to maximise your gains might also be worth considering.
Multiple account advantage
Susan Hannums, a finance expert from SavingsChampion.co.uk, has highlighted that superior returns are available to any individuals who are prepared to undergo the process of setting up multiple interest-paying current accounts under their name.
"If youíre savvy, once youíve set up the standing orders from the outset for each of the three accounts you can effectively move the same money around in order to meet the account conditions and the money moved out could come back into the account the same or the following day," said Ms Hannums.
ìYou will need to meet strict terms and conditions, including paying in a set amount each month, in some cases setting up direct debits. But multiple accounts offer the best rewards in the current low interest rate environment."
Ultimately, the superiority of a current account or an ISA as a saving medium is entirely dependent on your personal motives behind saving in the first place. If you are looking to shield your gains from your stocks and shares away from the taxman, then you are better off using a NISA, and it is recommended that you look around the market to find the best deal for one of these. Moreover, if you are looking for a simple and flexible account, and are not prepared to set up multiple accounts in order to maximise your gains, then using a singular and competitive ISA account might be better suited to your purposes.
However, if you are seeking to maximise your gains, and are willing to take proactive steps to achieve this, then using a multiple current account strategy is the most profitable way to move forward. By supplementing larger balance deals such as Santanderís 123 current accounts, with smaller higher interest deals such as Nationwide and TSBís, you could find the amount you earn from your savings soaring dramatically from its current value.