ISAs  

Fixed rate bonds trounce Cash Isas

Fixed rate bonds trounce Cash Isas

Research from Moneyfacts shows that those who choose a cash Isa over a fixed rate bond are missing out on the best rates.

Moneyfacts calculated the highest five-year bond pays 2.5 per cent against 2.15 per cent on the best cash Isa.

That would mean a loss of £383.70 in interest over five years based on a £20,000 investment for the Cash Isa investor compared with the bond investor.

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The gap between the returns on Isas and bonds has widened, Moneyfacts found.

In 2015, before the personal savings allowance was introduced, savers could get an average two-year fixed Isa rate of 1.69 per cent but today this has dropped to 1.08 per cent.

In contrast, the average two-year fixed rate bond paid 1.8 per cent in 2015 but now pays 1.37 per cent, so while it has also fallen, it sits significantly above the average Isa rate.

Recent figures show that fewer people than ever are using cash Isas due in part to the new personal savings allowance that means that basic rate can earn £1,000 a year in tax-free interest, while higher rate taxpayers can earn £500.

"It is clear to see that the Isa market is in dire need of a boost in competition to encourage new investors, but while the personal savings allowance remains, it’s going to be hard to convince savers to once again consider Isas as their first choice,” said Rachel Springall, finance expert at Moneyfacts.

“It is shocking to see just how much interest has been lost on Isas in the last few years. Savers may have turned to Isas for their tax-free benefits, but thanks to the personal savings allowance (PSA), that appeal has diminished and could well be deterring new investors."

Financial adviser Minesh Patel, from EA Financial Solutions, said that there was little point for investors in considering cash Isas.

He said: "They can be good for the very short term but even then a short-term investment might be better."

rosie.murray-west@ft.com