Deciding between an ISA and a Regular Savings Account – what should you do?

When comparing an ISA and a regular savings account there is one main benefit that an ISA can offer you and that benefit is that you don’t pay any tax on the interest that you earn!

But how does this work in practice?

The best regular saving accounts available offer the highest rates of interest. If you were basing your decision entirely on the interest rate on offer then a regular savings account may appear to offer a better value than an ISA. However, as with all non-ISA accounts, the interest you earn will be taxed. If you were to save your money in an ISA account the interest would be tax free.

Although the headline interest rate on an ISA may be lower than a standard savings account – because it is tax free – you still get to make more money overall.

Regular Savings Accounts (in this respect I mean ‘you have to put money in every month’) have catchy interest rates, but there are plenty of other catches. You have to put money into the account regularly, which may not always be possible. You cannot put in a lump sum to start with either and the maximum amount you can deposit each year is also kept relatively low. Interest is often only paid after the full 12 months and it’s not always easy to withdraw your money from regular savings accounts; with some accounts you must give a few months notice, and with others you can’t withdraw your money during the first 12 months at all.

Generally, an ISA comes with no such restrictions. See my A Guide To: Individual Savings Accounts for more information on particular points to note about ISAs.

If you do not like the idea of having your money locked away then you might find it easier to open a cash ISA account. Cash ISAs are tax-free, which makes them an attractive option to many people. Although you can get some regular saver cash ISAs amongst other types of Cash ISA, most are easy access meaning you can transfer money out whenever you need it.

Like regular savings accounts you can still only deposit a fixed amount per year, but the two main advantages are that you can add the same amount each year and you can do it as a lump sum if you find it easier, so you benefit from the interest on the whole lot for a full year. Also, unlike regular savings accounts the money isn’t transferred to an account with a worse interest rate after a year, although you should keep an eye on rates to make sure yours is still competitive.

Overall easy access or regular savings accounts are like easy access cash ISAs, except you pay tax. The interest rates are similar to ISAs, which means after tax you do in fact lose out.

The number of reasons to invest in a cash ISA rather than a regular savings account are growing all the time. Currently most adults save up to £7,200 in ISAs every year. The whole amount can be invested in a stocks and shares ISA or you could split it and put up to £3,600 in a cash ISA. In October 2009 everybody aged 50 or over was allowed a higher annual limit of £10,200, of which up to half can be saved as cash. In order to take advantage of this, you will need to be 50 on or before April 5 this year, to benefit in the current year. On April the 6th 2010 this is set to change; the limit will be increased to the same amount for everybody, regardless of age.

Interest rates are up and down in the current financial climate which means that some savers could benefit from changing who they bank with. Changing account providers for an ISA account is not quite as easy as switching a standard savings account as once the money is taken out of the account, the holder loses all the tax benefits they would have had. This can be prevented by insuring that your old provider and new provider pass on all the information about your account history.

It is worth comparing providers before deciding to open a Cash ISA as the (remember: tax free!) interest rate can make a dramatic difference to the amount you save.

I’m still feeling under the weather, courtesy of my vaccination on Friday. I very rarely get ill, so I always feel as though I’ve been hit by a truck when it happens! Runny nose, aching muscles and joints, thick head and a general lack of drive to do anything. In short, not fun.

But, one advantage is I have not done all that much the last couple of days. I have spent most of today in fact thinking about what I am going to do when I am finally debt free in the next month or so.

A few years ago I would have splurged on all kinds of ‘toys’, new gadgets, a big expensive holiday and so forth. The last 10 months has disconnected me almost entirely from the consumerism that got me here in the first place.

So what will I do when I am debt free?

I will treat myself to Burger King

As silly as this sounds, I have not eaten out for myself at all this year. I have been frugal in my food shopping, dining and cooking experiences, and just once I would like to say “to hell with it” and go have some fun in a culinary sense. I can be fairly certain to walk away pretty full and not spend more than £10 for the privilege.

It’s hardly haute cuisine, but it has been something I have been dreaming about for the best part of a year and it will be a major expense for me: Ordinarily £10 will feed me for a week!

I will pad out my Emergency Fund

I have never had one, and I know I need one. Especially now that the Grim Reaper has been trying the doors at work. I think a reasonable starting point would be £1,000 – and work upwards towards 12 months of expenses from there. Currently my emergency fund is £70, and that is a bit of a cruel joke in every sense.

I will take my parents out to dinner

My mum and step-dad have been my rock so many times over the years, but they saved me this year. They put me up – at great inconvenience to themselves – rent free, to help me get out of the dark place that a falling-apart marriage creates. Living rent-free has enabled my “Get Out of Debt In A Year” goal to be a real possibility and not some pipe-dream. Thank you, guys.

It won’t be cheap. While my step-dad will eat just about anything (with the exception of carrots), Mum is allergic to a lot of foods. I need to do some research to find a good setting that can cater for this.

I will open my 2009/2010 Cash ISA

I’ve been singing the praises of ISA‘s on this blog quite a lot. When I am out of debt, it’ll be time to heed my own advice and go and get one!

I will take a short frugal holiday

I need a holiday. I totted up that I have worked an entire extra month in just 9 months so far at work in my ‘debt payoff’ journey, and it has left me feeling old. A short holiday will be nice, just 4 or 5 days will be fine. Somewhere relaxing, somewhere I can just sit back and unwind. Somewhere I can soak up a bit of culture and a bit of alcohol. I will pay in cash, of course!

Should I expand this list somehow? Have I missed a blindingly obvious “when debt free” todo?

Good news for the over 50′s!

As of today the Cash ISA Allowance has increased from the 2009/2010 amount of £3,600 to an even greater £5,100. If the ISA you opened in April 2009 has less than £5,100 in it, now is the time to top it up if you can.  If you can’t afford the lump sum to make it happen, £380 a month between now and next April will also see you maxing it out nicely.

If you have a Stocks & Shares ISA, similarly your combined allowance is now £10,200 if you are over 50.

If you have not stumbled across Individual Savings Accounts before, or have a misguided aversion to risk and therefore avoided them altogether, you may like to read  “A Guide to ISAs” that I posted yesterday (not that I’d planned that or anything…), just to make sure you know all the facts before discounting them altogether.

The Telegraph has also researched the 7 Ways an ISA can save you money.

In short, an ISA should be your first port of call for any savings you have.