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I’ve got some cash I want to tie-up for a fixed term, either in a savings bond or cash Isa. I’ve had a look around and I’ve noticed there is quite a difference between Isa and non-Isa rates.
Why is there such disparity in terms of what these accounts pay? And should I ditch the idea of a cash Isa to earn a higher rate with a savings bond?
Anon, email
The gap between what fixed-rate savings bonds pay and their Isa equivalents is not new, and there are a number of reasons for the rate differences.
The top fixed-rate savings bonds currently offer up to 0.19 percentage points more than the equivalent fixed cash Isa.
Atom Bank’s one-year bond pays a market leading rate of 1.6pc, while OakNorth Bank’s same-term Isa offers a return of just 1.41pc.
The top savings rates are generally offered by smaller providers, who often operate solely online. However there is less competition in the cash Isa market as they require the bank or mutual to apply for a licence, which is costly.
Fixed-rate bonds offer better returns because they are more restrictive than most fixed Isas. Bond providers know they have savers’ money for a guaranteed term, giving them more options about how they reinvest that cash, which they pass on in higher rates.
Fixed Isas may allow access or withdrawals, subject to a fee. In some cases this penalty can be hefty. Even for the top five one-year deals, early withdrawals are penalised with a loss of 60 to 90 days’ interest.
Deposit restrictions could also be a reason why cash Isas pay lower rates. The maximum that can be saved into an Isa in one tax year is £20,000.
But savers can pay much more into fixed-rate bonds. Some providers allow customers to deposit £250,000, for example.
However, the Financial Services Compensation Scheme, a lifeboat fund, only protects £85,000 held with each institution.
Banks want customers’ cash, which they use to fund their businesses, and those with higher maximum deposits offer better rates.
Isa rates are also seasonal. Traditionally providers ramp up rates around February, the start of "Isa season", to entice customers and encourage them to deposit their remaining allowances before the tax year ends. However, these rates have been generally become less attractive.
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