Cash ISA vs savings accounts: Which is better?

The one that pays out most!

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The world of savings has been quite bleak for the past few years, with meagre interest rates on offer for savers. Deciding between a cash ISA and a normal savings account, however, isn’t as tricky as it seems.

Fixed savings accounts bring better returns

Those who can afford to lock away money can get a better rate. The obvious down side is that the money is locked away. Customers don’t have access to funds until the end of the committed term.

Some ISAs allow for flexible access to the cash, but this is reflected in usually lower interest rates.

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Current accounts can offer joining bonuses

Current accounts are the account you use for day to day personal finances. They can sometimes offer even higher returns compared to ISAs and savings accounts.

This is usually through either interest rates, though it’s also important to take joining bonuses into account. Some banks will give new customers hundreds of pounds if they meet certain criteria (usually you have to earn over a certain amount).

Don’t rule out the ISA yet

While better rates can be found if shop around, ISAs are still appealing to a lot of people. Here are a few reasons why:

  1. Long term tax shelter. By topping up your ISA, you can ensure long-term protection, even though interest rates might be poor.
  2. You can inherit ISAs. ISAs can be passed on after death, which is not the case with all savings vehicles.
  3. ISAs are immune to tax thresholds. A pay rise could see you tip over the taxpayer threshold. This makes no difference to what’s held in an ISA.
  4. Flexible ISAs. You can now take money out of ISAs and replace it in the same tax year without impacting your allowance. Rules around this vary from provider to provider, so make sure you check before withdrawing money.
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