The end of the tax year is quickly approaching and many people are looking to use up their Individual Savings Account (Isa) allowance for 2016/17.
Yet research by Defaqto shows that current accounts can offer a better home for your cash. It found the average interest rate offered by standard current accounts is 1.65% for a £5,000 balance - compared to just 0.81% with instant access Isas.
The gap is even more pronounced if you have less cash to save. For a £2,500 balance you will earn an average of 2.12% from a current account versus an average of 0.78% from an Isa.
In fact, the research found you would need to save at least £10,000 to get a better return from an Isa. With this level of savings you will earn an average of 0.8% from a current account compared to 0.82% in an instant access Isa.
The below table highlights how the savings vehicles compare.
|Amount saved||Average current account rate||Average instant access savings account rate||Average instant access Isa rate|
Defaqto says the interest rates offered on instant access cash Isas have been in decline for the past few years.
In 2012 the average Isa paid 2.5% on £5,000 balances compared to the 0.81% found today. In the last couple of years the average rate paid on current accounts has also dropped, from 1.91% in 2015 to 1.65% today.
However, the key benefit with Isas is that your cash remains tax-free year-on-year. See Are cash Isas still king? for more on this. Those willing to take more risk would also likely make more using a stocks and shares Isa. See How to maximise your returns with investment Isas.
Brian Brown, head of insight at Defaqto, says: “The savings market has been struggling for several years across all levels of savings with interest rates at a six-year low.
“Our analysis focused on those savers with a balance of £5,000 or less. This group of savers, who need easy access to their money, would be better off using a current account than a cash Isa, especially as the first £1,000 of interest paid on all savings is now tax free.
But, with fewer products available they will need to take time and research the market so they can identify the right account for their needs.
“For those willing to pay a monthly fee, there are current accounts available that offer higher interest rates. However, in some cases this would mean paying as much as £17 per month for the account, so savers should weigh up whether this is worth the cost.”