Highest ISA rates in years!

by John Fitzsimons on 15 February 2011  |  4 comments
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Rates on offer for saving tax-free are at their highest level in years.

If you fancy getting a decent return on your savings, without having to hand over a penny to the taxman, then I’ve got some good news for you – the rates you can enjoy from cash ISAs are at their highest level in years!

Cash ISA rates rising

According to financial information site Moneyfacts, the average cash ISA rate has risen to its highest rate in two years, since January 2009.

Here is how the rates on offer have changed over the past couple of years.

Clearly, the return from ISAs have been far better than rival no-notice accounts over the past couple and years.

And obviously, it’s very welcome for the rates on offer from such an important form of savings account to reach a 24-month high. However, I find it really difficult to get too excited about the promise of a return of 2.27% on my cash. So where can we get a better return? And what are the prospects for improved rates on offer in the months to come?

The best rates around

Below are some of the best ISA rates in the market today across a range of different time periods. To be honest, with base rate likely to move upwards a couple of times this year (more on that later) I’d be very wary about putting my cash in an ISA much longer than 18 months.

As you can see, the rates on offer from market-leading accounts are far more attractive, though still not exactly high enough to get the heart racing, even when you consider that any interest you earn on your cash will be completely free of tax.

Here comes ISA season

It’s very important to try to make the most of your ISA allowance each year. You cannot save more than £5,100 in cash in each tax year – once 2011/12 starts, your allowance for 2010/11 disappears! What's more, from April the ISA allowance increases to 10,680, so you'll be able to save up to 5,340.

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And as we head towards April, we see the start of ISA season, as providers fall over themselves to launch more attractive deals in order to snap up new savers.

ISA season feels like it’s already begun, with a succession of providers stepping up the deals on offer. In the past week alone we’ve seen Barnsley Building Society launch a two-year ISA paying 3.50%, as well as improved deals from lenders like NatWest, First Direct, HSBC, Lloyds TSB, Derbyshire Building Society and the Post Office.

And it’s only likely to continue, as banks scrap for your savings business. After all, they have to rely on your deposits in order to fund their lucrative mortgage range. 

You can find out more about ISAs in our free ISA guides.

What about other accounts?

Of course, you might wonder what all the fuss is about – you may have a savings account already that offers a similar rate of return to some of the better ISAs in the market today. Is it really worth bothering with an ISA?

The answer is a resounding yes. Comparing the rates on offer from a normal savings account with an ISA can be a bit misleading, due to the tax-free nature of an ISA. For example, if you have a cash ISA paying 2.90%, you’d need to find a regular savings account paying at least 3.63% to get the same return if you’re a basic-rate taxpayer. And if you’re a higher-rate taxpayer, you’d need to find an account paying a whopping 4.83% - good luck with that.

However, it’s worth remembering that not all ISAs offer you access to your cash without penalties, so you may want to keep some of your savings safety net in a normal, easy access savings account.

Inflation and bank base rate

Earlier, I mentioned that I would be very wary about putting my cash into an ISA of more than two years in length. That’s because as good as the rates are at the moment, it’s pretty clear that within a couple of years they will be even better. That’s because bank base rate will soon have to start heading northwards, and when it does, chances are the rates available to savers will have to do so too.

And the chances of a base rate rise happening sooner rather than later are much improved following the publication of the latest inflation figures, confirming that the Consumer Price Index inflation rate has jumped to 4% - the highest level since November 2008 and double the Bank of England’s target.

Far better in my view to take advantage of the decent short-term rates on offer now, rather than lock yourself in for the long term.

Not just cash

Of course, ISAs don’t just apply to cash – you can use up the rest of your total £10,200 annual ISA allowance with a stocks and shares ISA.

What’s more, as the return on your money from such ISAs over the past year was FOUR TIMES that you would have got from a cash ISA, it seems to offer a good opportunity for savers. However, remember that with investment, past performance have no bearing on how the investments will perform in the future, so there's just as much chance of losing money. Be sure to have a read of Quadruple the return on your savings!

More: Check out our free ISA guides | Inflation rockets to 4% | You’re being overcharged for your gas!

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