ISA rates improve as new ISA allowance increase draws closer

It is common knowledge that Individual Savings Accounts (ISAs) have been offered as the "no-brainer" tax free method for saving without having to pay tax on the interest earned. But recent surveys show that they may no longer be the best option.

ISAs were first launched 10 years ago in April 1999, offering savers the best rates on the market. But things have changed, and despite the attract feature of tax-free returns, savers may find they can get higher returns using high interest savings accounts and fixed rate bonds, while using their ISA allowance to invest into stocks and shares.

Nationwide recently upset its ISA customers after paying significantly higher rates on its two and three year fixed rate bonds with similar terms and restrictions. The building society currently holds around a fifth of Britain's personal savings.

Nationwide were offering a 3 year fixed rate bond paying 4.15% interest (3.32% after tax), but the ISA version offering virtually the same 3 year fixed rate bond ISA paid just 3.3% - just 0.08% higher.

The good news is that after this was highlighted by the Guardian newspaper, Nationwide increased its cash Isa rates to 3.75%. The bad news is that these new rates do not apply to existing customers, so if you opened an account when the rates were low, you will not benefit from the increase. The higher rates now offered are still marginally lower than those offered on its standard fixed rate bonds (before tax).

Although this news may put off many ISA savers, cash ISAs can pay high returns, especially as the new ISA allowance is set to increase - in October 2009 for those aged 50 and over, and in April 2010 for everyone else. This has sparked a rush for providers to improve rates in order to encourage people to take advantage of tax free returns, that offer better rates than any other savings accounts available on the market.

If you combine the elements from fixed rate bonds, together with the tax free interest from an ISA, you can get the best of both worlds and can benefit from some great returns with a fixed rate ISA. The highest paying fixed rate ISA on our tables is currently sat at 3.75% - that's the equivalent of around 4.68% - 0.68% higher that the highest fixed rate bond currently available on the site.

Instant access ISAs come in at around 3%, so if you want a safe investment, whether you're looking to fix your cash away or you require access to your funds, ISAs have taken back their standing to provide high income on your savings and should be your first port of call when looking to save.

An alternative method to make the most of your ISA allowance is through investment bond ISAs, offering rates that are determined by the success of the investment, and can prove to be very profitable. Investment bonds rate higher in terms of returns, but only if the bond you invest in makes money.

There are several different types of investment bonds, but the general rule with them is that in order to increase your potential returns, you must increase the risk you put in, whether this be simply risking the interest you could earn while protecting your initial deposit, or aiming higher and risking your entire investment.

What you need to remember is that the rates offered on investment bonds tend to be projected estimates, so your returns could differ to the amount originally advertised.

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