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Why it doesn’t always pay to chase the best cash ISA rates
If you don’t want to spend your time searching for the best rates, simple cash ISAs tend to be the best option, with rates up 15% for easy access ISAs over the last year.
Anna Bowes, co-founder of Savings Champion, said that even though the value of cash ISAs has been called into question since the launch of the Personal Savings Allowance in April 2016, rates have improved and they still represent a good option for savers. She added that savers could potentially miss out on valuable tax-free interest by shunning cash ISAs.
Simply choosing the best rate may not be the best solution, however.
Many of the leading cash ISAs include a variable rate bonus, which may disappear after the first year. Bowes gives the example of the Post Office Savings Premier Cash ISA Issue 11. In March 2016, this was paying a market-leading rate of 1.40% tax free/AER, but this included a variable rate bonus of 0.75% for 18 months. Today, savers who have not moved their cash are earning just 0.50%.
At the same time, the best simple cash ISA was the Coventry Building Society Easy Access ISA (2), which was paying 1.50% tax free/AER. This account is still paying a competitive 1.15%.
This can make a difference to your overall pot. Bowes said those investing the full cash ISA amount of £15,240 into the Post Office option and failing to move it would have £15,588 today. Those choosing the simple option with Coventry would have earned over £230 more in interest.
Bowes said: “We all know that most savers would prefer not to have to keep switching their savings, so these simple accounts are popular, as hopefully they will reward savers for being loyal.
“Of course, it’s still important to pick wisely as some providers are more generous than others. For example, NatWest Bank’s simple Cash ISA is currently paying 0.35% on a balance of £20,000, compared to Paragon and OakNorth who are both offering the best simple cash ISA rate of 1.45%. On a balance on £20,000, that is the difference of earning £70 over 12 months or £290.
“And it’s also important to keep an eye on the rate to make sure that it doesn’t simply dwindle over the years and become uncompetitive – if it does, that is the time to switch. This is particularly important for cash ISAs as they should be the last easy access accounts to be drawn from as once the money has been withdrawn, it needs to be replaced within the same tax year (if the flexible ISA facility is available) or the tax-free allowance will be lost forever.”
