Cash ISAs For Canny Savers

With interest rates rapidly taking the plunge, can you still get a good deal on your cash ISA? And is the tax-free status still an incentive?

Two hefty base rate cuts over the past couple of months to 2% have left the savings market looking pretty miserable. And with further rate cuts likely in the new year, the outlook for many savings accounts is far from inspiring.

So the big question is, is there still a good place to stash your cash?

Tax-free savings

One option you could consider is a cash ISA. The great thing about these accounts is that for once, the nasty taxman can't get his grubby hands on your hard-earned cash! (Remember though, you can only invest up to £3,600 a year.)

But the problem is, since the base rate fell to 2%, cash ISAs have suffered considerably. Banks and building societies seem determined to punish ISA account holders even more than regular savings account holders. And as a result, the big meanies have severely slashed cash ISA interest rates.

But let's take a look at what's still available.

Variable rates

The great thing about variable rate ISAs is that they are usually fairly flexible. So if you prefer having the option of being able to access to your funds if you need to, then variable is the way to go.

In the chart below, I've outlined three of the best variable ISAs currently on offer. I've ignored any accounts which come with complicated catches, such as having to invest in another account at the same time.

*This excludes Alliance & Leicester accounts

As you can see, the days of cash ISAs paying out interest rates of more than 6% are now just a distant memory. Instead, you are hard-pushed to get an account paying much more than 4% -- sad times indeed.

What's more, there can be no guarantee that the above rates will stay even this high for much longer. Because these are variable rates, they could change at any moment.

Fixed rates

If you'd prefer to have the security of knowing the interest rate on your account won't suddenly change, you may wish to opt for a fixed rate cash ISA instead. Although this means you'll need to lock away your cash for a set period, you will at least be guaranteed one interest rate for the entire period.

Here are two of the top accounts on offer:

In my opinion, the Cheshire Building Society cash ISA is the clear winner out of these two accounts. Although an interest rate of 4.5% AER may not sound particularly inspiring, in the current climate, you're not going to find much better. Plus, unlike Nationwide, the account enables you to transfer funds from another ISA. The only downside is that you will need at least £1,000 to open the account.

Another way

If none of the above accounts tickles your fancy, you might like the sound of First Direct's Regular Saver ISA. In terms of interest, it knocks the socks off all the competition, paying an incredible 7% AER for 12 months.

But before you get too excited, there are various rules and regulations you need to take into account:

• You must save between £25 and £300 every month -- you can't deposit your whole £3,600 ISA allowance in one go.
• You can only pay in the money by standing order from a First Direct 1^st account -- in other words, you need to have a current account with First Direct as well.
• You can't transfer money in from another cash ISA.
• No withdrawals can be made.

Despite these catches, I still think this is a great account and will be difficult to beat.

Is saving in a cash ISA still worth it?

Ahh, the million dollar question. Of course, up until now, the answer had always been yes. But with interest rates on most cash ISA accounts looking so pitiful, you may no longer be so convinced.

But don't forget, the fact that you won't be paying tax really does count for a lot. What's more, the interest rates on most other savings accounts are also pretty pathetic right now, and you'll be lucky if you get much above 5% AER. In which case, taking the tax benefits into account, cash ISAs still come up trumps.

What I would say though, is if you are thinking of investing in a cash ISA, don't wait for the April deadline. Interest rates are likely to fall again before then, so now is as good a time as any to lock in your return.

And if you can cope with locking away your money for a year or so, I would suggest securing a cash ISA with a fixed rate rather than variable. That way you can be reassured your interest rate won't change. After all, it's only likely to go down -- not up.

Happy saving!