Millions of savers could boost their returns by rethinking how they manage their fixed-rate savings accounts, a bank has urged.
According to Paragon Bank, over two million fixed-rate savings accounts with balances exceeding £20,000 could generate higher returns by moving a portion of their deposit into ISAs upon maturity, even if the ISA rate is lower.
Analysis of data from CACI reveals that as of May, there were 2.3 million fixed-rate non-ISA adult savings accounts earning 2.5 percent interest, each with balances of £20,000 or more.
Around 70 percent of these accounts are set to mature within the next 12 months, with most held in one-year fixed-rate accounts.
A non-ISA account with a £20,000 balance earning 2.5 percent interest would generate £500 in interest, with any additional earnings subject to a 40 percent income tax for higher-rate taxpayers.
Even though non-ISA fixed-rate accounts may offer higher rates upon maturity, the tax on interest often makes tax-free ISAs a better option for higher-rate taxpayers with large balances.
For example, £20,000 in a one-year fixed-rate savings account earning 5.15 percent interest would yield £1,030. After paying £212 in tax, a higher-rate taxpayer would net £818.
To achieve the same net return with a cash ISA, the saver would need to find an equivalent rate of 4.09 percent. Therefore, any ISA account offering a rate above 4.09 percent would deliver a better return.
By value, CACI’s data shows that £151.9billion is held in fixed-rate adult non-ISA accounts with balances of over £20,000 and earning more than 2.5 percent in interest.
Derek Sprawling, managing director of savings at Paragon Bank, said: “Fixed-rate savers can be tempted by the better rates on offer on non-ISA accounts on maturity, but for those higher-rate taxpayers, an ISA variant can deliver a more favourable return. Ensuring you utilise your full £20,000 ISA allowance is sensible financial management for this cohort of saver.
“The driver is tax. As savings rates and balances have risen since the onset of the pandemic, more savers are paying tax on their savings interest.
“By switching to an ISA, not only can higher-rate taxpayers generally generate better returns, but the cash held within the ISA wrapper is also free from tax in perpetuity.”
