Cash Isas: canny choices could earn you nearly 2% | Money

If you’ve done nothing with your savings in recent years – having assumed banks were paying terrible rates – it’s time to think again as interest rates have been rising to the extent it is now possible to earn 1.9% a year with few strings attached.

The end of the funding for lending scheme in 2018 has resulted in a host of new-entrant and challenger banks offering savings rates that put older rivals in the shade.

While Lloyds, Santander, HSBC and Barclays are paying 0.15%-0.35% on their instant access accounts, savers can get 1.5% with Virgin Money, or 1.49% with Marcus (Goldman Sachs’s new bank). Family building society is paying 1.51%.

Each tax year you get an Isa allowance of £20,000, with the basic choice of putting the money into a bank or building society deposit account or taking more risk and investing it in stocks and shares. You can mix and match as you like, for example putting £15,000 on deposit and £5,000 in shares. And you don’t have to put in £20,000 – you can open an account with just a few pounds. 

The main benefit is that the interest on the deposit account, or the dividends from the shares, is tax free. They are also free from capital gains tax. 

But note if you are only investing small sums, then the Isa “wrapper” offers few real benefits. You automatically have a personal savings allowance, which means you can receive up to £1,000 in interest (£500 if you’re a higher rate taxpayer) without having to pay any tax.

Investors are also allowed to pick up £2,000 a year in dividends without paying tax. 

The big attraction of Isas is if you are able to use the full £20,000 allowance (one for you and your partner) and stay invested for many years, then draw down the income in retirement, tax free. 

Separate rules apply for innovative finance Isas, help-to-buy Isas and the lifetime Isa.

If you are prepared to tie your money up for at least three months, you can now get 1.9% interest. The Charter Savings bank has a 95-day notice account paying that rate on balances on £1,000 and above.

One-year, fixed-rate saving bonds are probably not worth bothering with at the moment as they don’t pay significantly more than Charter’s 1.9% account.

If you are prepared to tie up your money for two years, the rates are again a step up. Oak North currently has the top-paying two-year bond – at 2.28%. You have to invest a minimum of £1,000 for 24 months and there is no access to the money during the term. The better-known Aldermore is paying 2.25% over two years with very similar terms.

Tax-free cash Isa accounts broadly pay slightly less than standard savings rates. Arguably the most attractive one-year fixed-rate cash Isa is from the Shawbrook bank. It pays a headline rate 1.74%, allows transfers in, with a minimum deposit of £1,000. Withdrawals are allowed, subject to 90 days’ loss of interest. The same provider has a similar two-year deal paying 1.91%.

Anna Bowes, co-founder of the savings rates comparison website Savings Champion, says people who haven’t look at their rates for some time are almost certainly missing out.

“While rates are still low they are much better than they have been. Two years ago the best easy access rate you could get was about

1% – today it’s 1.50%. Those people who have their savings cash languishing with a high street bank, are still getting a really raw deal – even though there have been two base rate rises. HSBC’s instant access saver is paying just 0.15%. Move the money to one of best buys and you are getting 10 times that rate and more if you are prepared to accept a few restrictions on when you can have access to your cash,” she says.

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