How to beat record low ISA rates
The interest rates on ISAs have dropped to their lowest ever levels, but savers can find a better return with a little effort.
Savers are enduring the lowest Cash ISA interest rates since records began, according to the Bank of England.
The average interest rate for a Cash ISA fell to just 1.43% in August, the lowest they have been since comparable records began in 2011. Meanwhile returns on notice accounts, including ISAs, are at their lowest level since the Bank of England started tracking them in 1999.
Recent weeks have seen many banks and building societies cut their interest rates, as predictions of the next Base Rate rise have moved back from the start of 2016 to next summer.
The low Bank Rate, which is set by the Bank of England, means that banks and building societies can borrow money cheaply so are less reliant on savers' deposits to fund their lending. As they don't need your deposits, the interest rates on offer are frankly dreadful.
Should you bother with ISAs?
With interest rates so pitiful it can seem that ISAs simply aren’t worth bothering with. But if you want a traditional savings account they still beat the returns offered by non-ISA accounts, thanks to the fact you don’t pay Income Tax on ISA growth.
For example, the current best buy instant access savings account comes from RCI Bank, and pays a rate of 1.65%. After tax, that is a return of 1.32% for a basic rate taxpayer or 0.99% for a higher rate taxpayer.
In contrast, the best instant access ISA comes from Virgin Money and pays 1.56%.
Ditch savings accounts
However, if you abandon the notion of traditional savings accounts you can get much better returns. Several banks and building societies are offering much better interest rates on their current accounts. The reason for this is they know if you hold a current account with them they have a much better chance of cross selling you other products like loans, insurance or mortgages.
Nationwide pays 5% interest on balances up to £2,500 for the first 12 months with the FlexDirect account. Meanwhile, TSB pays 5% on balances up to £2,000 on its Classic Plus account. There's also Santander’s 123 Account (which costs £24 a year, rising to £60 in January) which pays 3% interest on balances between £3,000 and £20,000.
Alternatively, if you are prepared to forego the protection of the Financial Services Compensation Scheme (FSCS) you could make even more money with peer-to-peer lending.
With companies such as Zopa or RateSetter you deposit your savings and they are then lent out to small businesses or individuals in need of cash. The returns are impressive - Zopa is currently offering rates of around 4% over three years, while RateSetter is paying 5.7% over five years. But your money won’t be covered by FSCS so if the peer-to-peer lender goes bust you could lose your savings.
Read Where to earn most interest on your cash.
Get a better return on your cash with a current account
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Where to earn most interest on your cash
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