Turn £10k into £12,552: How best buy 4.65% savings bond beats every single cash Isa | Personal Finance | Finance

Cash Isas are hugely popular with Britons holding almost £300billion worth of deposits but they don’t always pay the highest rates.

Banks and building societies still reserve their best offers for standard savings accounts, effectively discriminating against cash Isa savers.

It’s been a problem for years. Cash Isa savers are more likely to stick away larger sums as they look to max out their annual £20,000 allowance, so banks reckon they don’t need to pay them as much to win their business.

So they don’t.

For years, savers have opted for non-cash Isa accounts to get just a bit more interest, which most can take free of tax thanks to the personal savings allowance (PSA). 

The PSA was introduced in April 2016 and allows basic-rate 20 percent taxpayers to earn £1,000 savings interest a year outside of an Isa, before paying income tax.

Higher-rate 40 percent taxpayers can earn £500 a year before paying tax, but additional rate 45 percent taxpayers don’t qualify for the PSA. 

As savings rates rise more people are now breaching the PSA and facing a shock tax bill.

They can get round this but might have to accept a lower interest rate.

Non-cash Isa savers have been given a major boost as competition picks up in the fixed-rate bond market. 

Again, it’s smaller “challenger” banks that are leading the charge as the big four of Barclays, HSBC, Lloyds and NatWest stopped competing ages ago.

United Trust Bank has just released a string of market-leading savings rates, including a five-year fixed-rate bond paying an impressive 4.65 percent a year on balances of £5,000 and above.

Somebody who invested a lump sum of £10,000 would have £12,551.52 in total after five years.

With Chancellor Jeremy Hunt claiming that inflation will fall to just 2.9 percent by the end of this year, customers may get an inflation-busting return for the last four years of the bond.

That’s well worth having, provided you can lock your money away for such a lengthy time.

United Trust Bank’s five-year fixed rate bond sneaks ahead of Monument Bank, which pays 4.60 percent.

Interestingly, it is also notably ahead of United Trust Bank’s five-year non-cash Isa bond, which pays just 4.05 percent.

The message is clear, you can get a better return if you save outside of an Isa. That’s also free of tax, just as long as you don’t breach the PSA.

There is another way Isa savers come off second best. Too many leave their money in legacy cash Isas for years, often getting next to no interest.

Isa transfers aren’t just possible but very easy to do, with your new provider doing most of the legwork, so take advantage.

This is a good opportunity to review all of your rates, and shop around to get something better.

READ MORE: Halifax raises interest rates on ISA range ahead of deadline today

For those who do not want to tie their money up for as long as five years, United Trust Bank pays 4.45 percent on its one-year bond and 4.55 percent over three years.

Rival challenger bank SmartSave pays slightly more over one year, at 4.51 percent, while Charter Savings Bank pays 4.46 percent.

Over three years, Tandem runs United Trust Bank close paying 4.5 percent.

Anna Bowes at rate tracking service Savings Champion applauds United Trust Bank for unleashing a set of market-leading bonds over different terms.

She said these are some of the highest rates we’ve seen for weeks. “With inflation soaring to 10.4 percent in the year to February, getting as much as you can from your savings is vital.”

Bowes suggested now be a good time to lock into a five-year fixed rate. “Today’s rates will look even better once inflation and interest rates start to fall, as most analysts expect.”

Even the best savings rates pay well below inflation and Victoria Scholar, head of investment at Interactive Investor said: “Savers who want to generate a higher return without taking on too much to ask might consider a stocks and shares Isa instead.”