ISAs vs Fixed Rate Bonds – Which is Better For Me?

It’s always a nice feeling to have savings; you’ve cleared your worst debts and now you can put something away for later life. However, knowing where to put your money presents a little conundrum, because there are a number of financial products out there where you can get a good return on invested cash – but which one is best? Some of the top products for earnings on your savings are ISAs and fixed rate bonds, and both normally offer better rates of gross interest than standard savings accounts, but exactly which one is better for you depends on your circumstances. Have a read of this article to see which would suit you more.

What is an ISA?

An ISA is an ‘individual savings account.’ You’ll see that many of them have similar AERs to normal savings accounts, but because they are tax free, you’ll be able to get a higher return for your investment. However, you get a yearly allowance which restricts the amount you can invest per year. If you take out a Mini ISA you can invest up to either £3000 in cash, or £4000 in stocks and shares – you can’t do both. In a Maxi ISA you can invest the same amounts in both elements combined, so you can have a total of £7000 invested per year. You can withdraw money at any stage, but you won’t be able to put that money back in later in the year (your ingoing allowance remains the same). Each tax year, beginning 6^th April, you also get a new ISA allowance, but if you don’t use it, you lose it. It is also worth noting that the rates on ISAs can fluctuate with interest rates.

What is a fixed rate bond?

In short a bond is a debt security in which the issuer owes the holders a debt and pays the principal and interest at a later debt. In basic terms, it’s effectively a loan that you give to a bank, for which they repay you with interest. You pay tax on the interest, but the rate of interest is fixed for the term of the bond, so it doesn’t fluctuate with interest rate changes. Most bonds don’t allow you to access the sum that you put into them during the term without a penalty, and you usually can’t add to a sum after an initial deposit. However, there’s currently a special fixed rate bond offered by Northern Rock that allows you to make withdrawals without notices, while you can also add money to you bond while it is still available to new customers. The investment is guaranteed by the government, so you don’t need to worry about Northern Rock’s financial difficulty. It’s guaranteed rate of 6.9% gross AER (guaranteed until 20^th January 2009) make it the highest grossing bond on the market, and higher than any ISAs offered.

So which is best?

Both products have their pros and cons. If you have a substantial lump sum, then putting some of it into Northern Rock’s bond will give you a very good return for one year. Because you can withdraw from this product without penalty, it’s worth putting as much in as possible and then taking some out if you need it. An ISA is a better product if you don’t have a large amount of money currently saved, because you can pay into it regularly over a tax year. The stocks and shares element makes it particularly attractive for long term investment if you think you’re only likely to save under £7000 a year. A fixed rate bond will probably get you a better rate over the short term, but ISAs would be better if you are looking to save small amounts regularly for more than a few years. Take a look at Alliance and Leicester for a range of ISA products.