Cash ISA (Tax free) vs fixed term savings

[Myfirstsecondthird]

I got some very good support yesterday, so I am hoping to get some further input today.

How do you compare different 'savings options'. I am looking at 2 different products:

1. Cash ISA (tax free). Rate is 3.93% (Club Lloyds Advantage Cash ISA)
2. Fixed term accounts. Rate is 5.16 (from Money Saving Expert link).

My question is - what rate would be better than the Cash ISA option when comparing tax free vs taxed accounts? I am on the 40% income tax rate. I am struggling to see how much better a rate needs to be from 3.93%

Thanks

How much are you saving?

Around £10k (so within the Cash ISA limit). However, I have some other savings (around £45k) which will get me close to the £500 personal savings allowance (I think that is what I would have?). I am trying to figure out if at what interest rate point it is better to pay the tax rather than get the Lloyds offer of the £3.93%.

Shawbrook 1-year fixed rate ISA is 5.01%
Moneybox Cash ISA easy access is 5.09%

Why are you opting for ISAs with dismal interest rates when there are many offering over 5%?

https://savingschampion.co.uk/best-buys/personal/fixed-rate-cash-isas

https://savingschampion.co.uk/best-buys/personal/easy-access-cash-isas

Good point. I always went with lloyds as I bank with them, but this is something that I need to consider going forward.

The question is still there - at what point does the 'tax free' rate become worse than a 'taxed' rate. What difference in rate does there need to be?

Is a taxed account of 5.6% and a non taxed account of 4% equivalent? (4 x 1.4?) or what is the calculation that I would need to do to compare?

Assuming you don’t have a savings allowance, just take 60% of the non-ISA rate.

The point about ISAs is you can build up a large tax free savings wrapper over years. There are now some cash ISA millionaires.
So the difference in interest becomes less important over time.

Suppose you save £10K this tax year, and don't put it in an ISA.
Next year you find you have an extra £20K to save so you put it in an ISA.
But the interest accrued in your non-ISA accounts now pushes you over the savings tax threshold. You have lost the opportunity to utilise the previous year's ISA allowance to shelter the £10K from accrued interest going forward.

@seekingasimplelife that is such a good point! Never thought of it like that. So glad I have asked the question.

A few interesting things to note about ISAs going forward.

If you want to move your ISA pot to another provider for a better rate, always request a transfer from the new provider rather than withdrawing the cash from the old provider, as this preserves the tax free wrapper from the current tax year and all previous years savings.
Checking new rates every 3 months and switching if necessary is about the optimal option for the best returns.

Flexible cash ISAs allow you to withdraw cash and replace it before the end of the financial year. So if you put £20K in a flexible cash ISA you can withdraw it and pay it back in again within the same tax year, and still be within your ISA allowance.

Most providers of Cash ISAs allow you to withdraw the money if you need to - even with limited access accounts or fixed rate fixed term products, but they may impose a penalty or loss of interest (check T&C's).
This is not the case with other fixed-rate, fixed-term savings products where there is often no access until maturity.

Money Saving Expert has a page about this: https://www.moneysavingexpert.com/savings/best-cash-isa/

You have to X 1.66

Also check your other savings are earning as much as they could be - are they also with Lloyds and are they getting at least as much as the ISA rate or more? Are they locked away or accessible?

The question is still there - at what point does the 'tax free' rate become worse than a 'taxed' rate. What difference in rate does there need to be?

martin Lewis answers this on his website under ISA section, from memory it’s 1.5%

so if you can get an ISA at 4.5% you’d need a savings account at 6% + to be bettering your interest

Can you put any in a pension instead as you then get the tax relief which outdoes any interest you can get. Trouble is it’s locked in for years depending on your age

That isa rate is crap. Google best isa rates moneysaving expert

I do both regular saver at higher rare interest, when it matures dump the contents in an isa