Why ISAs are still worth it

Are you one of the thousands of savers who are thinking of giving ISAs a miss this year? Here's why you should think again.

The financial crisis continues to rip savings rates to shreds. So, you would think anything that could give your cash a helping hand - such as tax-free interest - would be snapped up instantly. Surprisingly, recent statistics from The Co-operative reveals the reverse is true. In fact, the bank claims almost three in four people have no intention of applying for an ISA before the end of the tax year deadline on April 5.  

That said, many of us are still saving frantically to build up an emergency cushion should the recession lead to a very rainy day. But why ignore ISAs? And why pay tax when you don't have to?

Savings rates have taken a battering across the board, but there are signs that more generous returns from cash ISAs are on the way, particularly for those of you who want to save every month.

Cash ISAs come in all shapes and sizes, so I'm going to look at the best buys for each type. First up, easy access:

The best buy is the Cash Plus ISA from NatWest/Royal Bank of Scotland which pays a variable rate of 3.51% AER. That doesn't seem like an earth shattering return, but in the hands of a basic rate taxpayer, it's equivalent to 4.39%, or 5.85% for higher rate taxpayers.

In other words, that would mean you need to find a taxable account which pays 4.39% or 5.85% - depending on your tax status - to earn the same amount of interest. Now, that's not going to be easy in today's savings market. After all, the best buy ordinary easy access account - the Egg Savings Account - pays a rate of just 3.25%, so it can't compete with the market leading ISA.

A handful of the top cash ISAs are shown below so you can get an idea of today's best rates:

Easy access, variable rates

*You need to have a NatWest current or instant access savings account. **Advantage Gold or Advantage Private account customers will earn 0.5% bonus (4.02% AER) if they open Cash ISA Plus by 20 April 2009. Cash ISA Plus also available at Royal Bank of Scotland with 0.5% payable to Royalties Gold, Royalties Premier or Royalties Private account customers.

Unfortunately, you can't transfer old ISAs into the NatWest/RBS Cash ISA Plus to earn the best rate on all your ISA savings. If you would like to consolidate all your ISA money into one home, the NatWest E-ISA is a better bet. Here savers with a total balance of £10,000 or more will earn the same  top rate.

I've excluded the most competitive account I can find from the table. This is the Abbey Super ISA where you can earn an even higher rate of 4.25% for 13 months. But I hesitate to recommend it because you'll need to open one of Abbey's capital guaranteed investments (or other qualifying investment) at the same time. I'm not keen on accounts which encourage savers to take out potentially unsuitable investments just to earn a decent rate on their cash.

Easy access ISAs are looking pretty good when you compare them with ordinary savings accounts. But the trouble is if you open an account with a variable rate you can't guarantee your return. That's why many savers are tempted by fixed rates. Luckily cash ISAs are available with fixed returns too, and some of the best are shown below:

Fixed rate ISAs

Here the rates are slightly lower than easy access accounts, but the best buy - Fixed Rate Halifax ISA Saver - isn't far behind at 3.30%. With this account you'll know exactly what your return will be for the next four years. But I'm a little concerned interest rates won't stay low for for the term, and I wouldn't want my return to get left behind if other rates begin to climb. So, personally, I would go for a shorter commitment such as the Fixed Rate Cash ISA from Saffron BS which pays the same rate of 3.30% for 2 years.

Both of these accounts accept ISA transfers, so if you're happy to tie all your ISA money up in one place for a while, they could be a good choice for you.

If you don't have a lump sum to save, you might be thinking about a regular saver instead. The good news is you can now earn really generous rates on monthly ISA savings. Take a look...

Regular ISA savers

*Payments made by standing order from a First Direct 1st Account only.

As you can see it's now possible to get great rates of 7% on regular ISA savings, which is a huge margin above the 1% Bank of England base rate. These returns are equivalent to 8.75% for basic rate taxpayers, and 11.67% for higher rate taxpayers. Now that can't be bad!

What's more, these rates are guaranteed for the next 12 months. But don't forget, it's not easy to get your money out during the term. You should only apply for a regular saver if you're pretty sure you won't need access. And as these accounts are specifically for monthly saving they won't accept transfers either.

All-in-all, I think cash ISAs still have something valuable to offer savers, and should be your first port of call before you move onto ordinary savings accounts. Remember in the run up to the end of tax year deadline on April 5, banks and building societies tend to launch new accounts and rates to win over stacks of new savers, so keep your eyes open before you take the plunge.

And, on a final note, if you fancy something a bit more adventurous - with the hope of a better return - why not try a stocks and shares tracker ISA for some, or all, of your ISA allowance?

Compare ISAs here

More: How to find the best cash ISA | How to choose an ISA