New cash Isa products: Best returns for savers

With the tax year changeover approaching, a few new cash Isa products have been launched in the past 10 days. On the whole, though, the returns on offer make pretty dismal reading for savers.

For many years, providers pushed for a higher tax-free savings allowance – but even though it was hiked to £15,000 last year, only a minority of savers are utilising it to its full potential. In reality, is that really much of a surprise? How many people do you know who can afford to tuck away the equivalent of £1,250 every month?

New research from Santander found that almost three quarters of people aren't aware of the increased allowance, while a separate report from Nationwide building society said two thirds of its Isa customers have saved £5,940 or less in the current tax year.

One of the more attractive offers currently available is from HSBC: its Advance current account customers can open a loyalty Isa paying 1.5 per cent interest plus an additional interest bonus of £10 a month. You don't have to deposit thousands to qualify for this deal either – a £25 monthly payment, or £300 lump sum, is all that's required.

If you check the "best buy" tables for instant access Isas, it's disappointing to find that National Savings and Investments and Skipton building society offer the joint top rate of 1.50 per cent but neither allows transfers in of previous years' Isas and the latter isn't available online.

The best deal for instant access cash Isas is from the Post Office, paying 1.50 per cent with transfers in permitted and the option to open the account online.

If it's a fixed-rate deal you're after, Santander 123 customers are rewarded for their loyalty with a competitive two-year rate of 2 per cent (1.50 per cent for non-123 customers). For a one-year fix, Virgin Money is currently paying the best rate, 1.60 per cent, and allows transfers in. The top deal for two years is 2.10 per cent from Clydesdale and Yorkshire Banks.

There is little incentive to lock your Isa cash away for longer than two years as even the best five-year products are only offering 2.25 per cent to 2.30 per cent – not much of an incentive for relinquishing access to your savings pot for an extra three years.

Yorkshire building society has followed up the success of its Triple Access Saver account with an Isa version of the same deal. You can earn 1.35 per cent and gain access to the passbook-based account up to three times a year without penalty.

One positive aspect is that even though interest rates are uninspiring at the moment, putting your money in a cash Isa means it is out of the taxman's reach not just for the coming 12 months, but for future years too. At some stage savings rates will start to pick up again and, when they do, the tax-free element in your Isa accounts will improve too.

It's not surprising that people are looking at alternative ways of getting a meaningful return on their nest egg, particularly when you consider that an Isa allowance of £15,000 at 1.5 per cent generates a tax-free benefit of just £45 over a standard savings account at the same rate for a basic-rate taxpayer.

When the peer-to-peer companies finally get the green light for their products to be included in Isas, more people will wake up to the higher returns on offer. Peer to peer is not totally safe but the incidence of customers actually losing money is very rare, and with rates of two or three times those offered by banks, more savers may be prepared to take a calculated risk.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk