Bonds vs ISAs: where will savings earn the most in interest?
CASH Isas have long been cherished by savers for their tax-free perks. But the introduction of the personal savings allowance means people no longer pay any tax on their savings interest – whether held in an Isa or elsewhere.
The personal savings allowance has meant that, since April 6, 2016, basic rate taxpayers can earn up to £1,000 in savings income tax-free. Higher rate taxpayers can earn up to £500.
Research into how cash Isas compare with bonds has found that fixed-rate bonds are now far out in front on average rates available.
The average two-year fixed Isa pays a rate of just 1.08% while a fixed bond for two years pays 1.37% typically, according to Moneyfacts.co.uk.
Savers looking for a five-year fixed-rate Isa can expect a rate of about 1.68%, while a five-year fixed-rate bond pays an average of 1.93%.
Moneyfacts.co.uk finance expert Rachel Springall says the gap between the returns on Isas and bonds was not always so wide.
She says: “In 2015, before the personal savings allowance was introduced, savers could get an average two-year fixed Isa rate of 1.69%, but this has dropped to 1.08%.
“In contrast, the average two-year fixed-rate bond paid 1.80% in 2015, but now pays 1.37%, so while it has also fallen, it sits significantly above the average Isa rate.”