The bad news is that no non-ISA cash accounts beat the current rate of inflation. With the latest Consumer Prices Index standing at 2.8 per cent, a basic rate taxpayer would have to find a savings account paying at least 3.5 per cent to negate the effects of tax and inflation. A higher rate taxpayer, meanwhile, would have to find an account paying at least 4.66 per cent. Such rates simply don’t exist at the moment.
Even Cash ISA rates continue to offer little reason for cheer. According to the latest best-buy tables from Money Saving Expert, only five products (three of them from Halifax) beat inflation. Four of these involve tying up your money for at least three years.
This is not to say, of course, that there aren’t many advantages to having a decent sum of savings in cash. The prevailing wisdom is that, before you consider investing, you should have at least six months’ spending money in a cash account. Unlike investments, there is no risk of cash losing value above inflation. And you are protected by up to £85,000 per institution if your bank goes bust.
Here, Nutmegonomics looks at the pros and cons of some of the most popular cash savings accounts.
Tax-free cash savings
1) Instant-access Cash ISA
Pros: You can save up to £5,760 this tax year without paying any tax on the interest. You can make regular savings and withdraw whenever you like – although do bear in mind that if you reach the limit for the year and make a withdrawal, you can’t put more money back into your ISA.
Cons: Rates are currently very low. Many include bonuses which expire after a year.
Average market rate: 1.41 per cent
2) Notice Cash ISAs
Pros: Slightly better rates than instant-access Cash ISAs and more accessible than fixed-rate Cash ISAs (however, the notice period for withdrawals can be up to 90 days).
Cons: There are penalties for quicker withdrawals.
Average market rate: 1.75 per cent
3) Fixed-rate Cash ISA
Pros: If you’re willing to tie up your money for longer – typically one to five years – you’ll normally get a higher rate of interest than in an instant-access account.
Cons: If you want the money sooner, you’ll have to pay a penalty (typically a loss of between 90 and 365 days’ interest). If interest rates rise during the fixed term, the rise won’t be passed onto you.
Average market rate: 2.20 per cent
4) Junior Cash ISAs
Pros: In 2013/2014, you can pay up to £3,720 into a Junior ISA on behalf of a child. The allowance can be split between Cash and Stocks and Shares – although unlike adult ISAs, the whole sum can be put into cash. Interest rates are currently higher than for adult Cash ISAs.
Cons: When the child turns 18, the money is theirs and you have no say in how it’s used.
Average market rate: 2.69 per cent
Taxed cash savings accounts
1) Instant-access savings account
Pros: Easy access with no penalties for withdrawals. Ideal for raiding on a rainy day.
Cons: The lowest interest rates of any savings account.
Average market rate: 0.78 per cent
2) Notice savings account
Pros: Similar to notice Cash ISAs (without the tax advantages).
Cons: Similar to notice Cash ISAs
Average market rate: 0.86 per cent
3) Fixed-rate savings account
Pros: Similar to fixed-rate Cash ISAs (without the tax advantages). They might be a good option if you’ve already filled up your Cash ISA.
Cons: Similar to fixed-rate Cash ISAs: you’ll have to pay a penalty if you want your money sooner. Also, if you’re thinking of locking your money up for a long time, you might want to consider investing instead – although bear in mind that this puts your capital at risk and you might get back less than you put in.
Average market rate: 2.21 per cent
4) Regular savings account
Pros: High rates of interest on regular monthly savings – typically sums between £20 and £500 per month.
Cons: The rates aren’t as good as they appear at first glance as you can only save a limited amount every month. Many accounts reduce the interest rate in any month that you make a withdrawal.
Average market rate: 2.62 per cent
Average market rates sourced from www.which.co.uk
Top five inflation-beating Cash ISAs sourced from www.moneysavingexpert.com/savings/best-cash-isa#fixed
The views and opinions expressed herein are for informational purposes only. They are not personal recommendations and should not be regarded as solicitations or offers to buy or sell any of the securities or instruments mentioned. The views are based on public information that Nutmeg considers reliable but does not represent that the information contained herein is accurate or complete. With investment comes risk. The price and value of investments mentioned and income arising from them may fluctuate. Past performance is not an indicator of future results, and future returns are not guaranteed.