Consumer Prices Index (CPI) inflation may have fallen to 1.9 per cent but it is still hard to find a cash individual savings account (Isa) that beats this unless you are prepared to lock up your money for at least two years. Finding accounts that beat Retail Prices Index (RPI) inflation, currently 2.8 per cent, is even harder. But you may be an investor who needs to hold a very low risk asset such as cash, while for many it is necessary to allocate at least a portion of your savings to this.
Locking up your cash for a fixed term increases risks for savers because although you can earn interest rates as high as 3 per cent, according to data from Moneyfacts.co.uk, there are a number of disadvantages.
Fixed-term accounts typically do not allow you to access your money before the term is over without incurring a penalty, typically a loss of a certain amount of the interest you would have earned.
But if you lock up your money for a long period of say, three years or more, many things can change in that time. Inflation could rise meaning that what was an inflation beating account at time of opening is no longer. Interest rates could also rise meaning you are stuck in an account that is not offering one of the best rates available.
For this reason some advisers say you shouldn't lock up your money for more than two years. If you do go for a longer-term fix, then you should go for as high a rate as possible to at least ensure you are rewarded for the risk, and to increase your chances of staying ahead of interest rates and inflation.
Advisers also suggest you do not lock up all your money as you might need some for emergencies and quick access, so a solution could be to have a spread of accounts with different time spans.
Holding your cash within an Isa is still preferable to holding it without, as interest you earn on savings accounts is subject to income tax. Depending on your banding, you could pay up to 45 per cent of any interest you earn to the taxman, but inside an Isa interest earned on cash is tax free. So the higher your rate of tax, the more beneficial a cash Isa will be compared to a normal bank account.
For the 2013/2014 tax year, you can put up to £5760 cash into an Isa.
We set out some of the best cash Isa options available at time of writing.
Best buy two-year fixed-rate cash Isas
| Account | Annual equivalent rate (%) | Notice/term | Mininum investment (£) | Transfer in | More details |
| Britannia Fixed Rate Cash Isa | 2.05 | 31.01.16 | 5,760 | Yes | www.britannia.co.uk |
| Leeds Building Society 2 Year Fixed Isa Rate Issue 51 | 2 | 31.03.16 | 1 | Yes | www.leedsbuildingsociety.co.uk |
| Bank of Cyprus UK Fixed Rate Cash Isa | 2 | 2 year bond | 500 | Yes | www.bankofcyprus.co.uk |
| Kent Reliance two year flexible fixed rate cash Isa issue 12 | 1.9 | 2 year bond | 1,000 | Yes | http://www.krbs.com/ |
| Chelsea Fixed rate e-Isa to 29.2.16 | 1.9 | 29.02.16 | 100 | Yes | www.thechelsea.co.uk |
| N&P Building Society 2 year cash Isa | 1.9 | 2 year bond | 5,760 | Yes | www.nandp.co.uk |
Source: Moneyfacts.co.uk as at 4 March 2014
Best buy three-year and over fixed-rate cash Isas
| Account | Annual equivalent rate (%) | Notice/term | Minimum investment (£) | Transfer in | More details |
| Skipton Building Society Online 5 Year Fixed Rate Isa | 3 | 16.03.19 | 500 | Yes | www.skipton.co.uk |
| Newcastle Building Society Fixed Rate Options Isa Issue 97 | 2.9 | 18.03.19 | 500 | Yes | www.newcastle.co.uk |
| Coventry Building Society Fixed Rate Isa (19) 31.5.2017 | 2.75 | 31.05.17 | 5,760 | No | www.coventrybuildingsociety.co.uk |
| Nationwide 5 year fixed rate Isa | 2.5 | 5 year bond | 1 | Yes | www.nationwide.co.uk |
| Principality Building Society 5 year fixed rate cash Isa issue 125 | 2.5 | 5 year bond | 500 | Yes | www.principality.co.uk |
| Chelsea Fixed Rate Isa to 28.2.17 | 2.2 | 28.02.17 | 100 | Yes | www.thechelsea.co.uk |
| Yorkshire Building Society Fixed rate Isa to 28.2.17 | 2.2 | 28.02.17 | 100 | Yes | www.bankofcyprus.co.uk |
| Bank of Cyprus UK Fixed Rate Cash Isa | 2.2 | 3 year bond | 500 | Yes | www.bankofcyprus.co.uk |
| Bank of Scotland Fixed Cash Isa | 2.15 | 4 year bond | 500 | Yes | www.bankofscotland.co.uk |
| Lloyds Bank Four Year Fixed Rate Cash Isa | 2.15 | 48 month bond | 3,000 | Yes | www.lloydsbank.com |
Source: Moneyfacts.co.uk as at 4 March 2014
