Would you close your ISAs to get higher returns even after tax?

[ChocolateWombat]

I have had £30k in ISAs that came to the end of their fixed rate deal. I can now get a better return, even after tax, by opening g a couple of Santander 123 accounts, but realise I will lose the tax free status.

In the past, I probably would have put up with the lower rate, to maintain the tax free status, but now with theISA a.lowance increasing to £15,000 for both myself and my husband, there seems to be no real gain to keeping the money in ISAs until the rate beats easy access accounts.

Is my thinking correct or am I missing something?

Thanks.

It rather depends on the alternative deal and the amounts in question. If the deal runs out after a certain length of time for example then, once you've taken the ISA money out of its tax-free status, you may not be able to return it all in one go.

However, as a broader principle, it is not a bad idea to make your money work and reduce your risk by spreading it around a little. My savings are in ISAs, funds, pension... all kinds of different things.

My feeling is that it is better to keep it all in the tax-free wrapper as interest rates are likely to rise at some point. Once it's out it's out.

The difference between what you are getting on your current isas and what you get after tax in the 123 account is probably not great enough to risk taking it out of the tax free zone.

I wonder if, when the rules about isas change in July, that there may be one or two better rate products to choose from and you can transfer the money in
ALso I think the limit on the Santander account for 3% is 20k..

How much actual cash would you gain? And how much are you able to save per year? Now the annual limit is going up to 15K I guess there's less incentive to stick with your ISAs for better for worse to keep the tax free status. Unless you're wealthy enough to be able to save 15 grand each every year, then you'd lose nothing by withdrawing the cash, putting it all in a 123, and then putting it all back in a ISA as soon as you see a good one.

From Martin Lewis:

ISA rates are higher than normal top savings rates, but they are beaten by high rates on some current accounts to persuade you to switch to them.

Of course the key is you don’t pay tax on ISAs, so you have to compare it to the after tax rate. Here are the top picks in brief, but click the links below for full info on these accounts.

• Santander 123 pays 3% on £3,000 - £20,000. That’s 2.4% after basic-rate tax, and 1.8% after higher rate.
• Lloyds' Club pays 4% on £4,000 - £5,000. For basic-rate taxpayers that's 3.2% after tax, for higher-rate payers it's 2.4%.
• Nationwide FlexDirect pays 5% on up to £2,500 for a year, 1% after that. That's 4% after tax for basic-rate taxpayers, 3% for higher rate.

You also need to look at the bigger, long-term picture. Saving in an ISA guarantees tax-free status on that cash for as long as it's kept in an ISA. Interest on a current account is likely to be short-lived. Though in an ideal world, you'd have both. Try this:

First, put cash in a high-interest bank account. As long as the after-tax rate beats your chosen ISA, do this now rather than using your ISA allowance. See Current Accounts for the full options.

Then, use the cash to open an ISA in March 2015. A week before the tax year ends, move the cash out of the bank account to fill your ISA allowance. That way you get the short-term high rate from the banks, but you still get the tax-free benefit of your ISA allowance. See Martin's ISAs vs high-rate bank accounts blog for full details.

do you have any more cash that you are planning to put into ISAs? If not, then moving it to Santander for now seems to make sense.

you and your husband open a 123 account each and you can then house all the money at 3%.

or you can put some of it in the mentioned accounts: Nationwide, Lloyds Club and also TSB have one at 5%. Open one each of each (if you see what I mean). Watch Nationwide as the rate will only last a year at most.

Thanks everyone.
Yes the plan is to have 2 Santander accounts, in mine and my husbands name. We can then put all of the £30k into those 2 accounts and get 3% gross on the whole lot.
If and when a better ISA appears after July, when we can out £15,000 in ISAs each, we would move to the ISAs.
As we continue to save each Mon th,my hat too would initially go into Santander to earn 3% too.
I can see the merit in moving it into ISAs at the end of the tax year, if not before.

Can't see any losses or disadvantages from doing this and losing the tax free status temporarily, because the tax free allowance is increasing.

what is the amount you have to be paying in monthly on the 123 account.

piratecat, I think it's 1K, plus you have to have DDs going out.

With two accounts, you can set up standing orders so the required money moves between the two.

I've just set up something similar with Lloyds Club (they pay 4% but only up to 5K); one joint and one sole account. They have an associated regular saver which also pays 4% - other perks like cheaper mortgate rates and cinema tickets too - minor faff but worth a look IMO.

£1000. Plus 2 direct debits.

just set up a standing order to move money between the two accounts.

No, it's £500 minimum payment. It has to come in from outside Santander so you cannot simply move the £500 between the 2 accounts.
It is possible to hold 2 accounts if one is joint, so actually 3 between a couple.
Yes 2 DD have to go out.

There is cashback on bills paid by DD, but a £2 per month fee. If you pay council tax or utilities by DD you should more than recover the £2.

oops, you are absolutely right chocolate - so many standing orders that I get confused! Apologies for duff advice, the money does indeed have to come from another bank. Or a wage.

I can have another one of these accounts? That solves a problem!