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The ISA allowance for the 2017-2018 tax year has been lifted from GBP 16,000 in the previous tax season to GBP 20,000 in the current period. With rates as low as they are, savers will have to be patient no matter which ISA they choose.
Bank ISAs are a competitive market, and Santander has been known to set the standard on High Street among big banks with its products and rates despite also choosing at times to forego certain customer incentives permitted by regulators.
To demonstrate its willingness to pay, Santander cash ISAs in 2010 guaranteed savers an interest rate of 3.5% per year, well above the Bank of England base rate of 0.5%. Since that time, interest rates have fallen precipitously amid a persistently low rate environment kept intact by economic conditions and the UK’s upcoming exit from the EU. Now with improving economic conditions and Brexit poised to take hold the persistently low interest rate environment is finally expected to shift, analysts say. Rates are largely expected to rise by 25 bps to 50 bps in November for the first time more than a decade, reversing a rate cut that was inspired by Brexit in the summer of 2016 to 2009 levels.
Some banks are preempting the move with more competitive products but no changes have been announced for Santander ISAs. Macroeconomic conditions could have a positive sway on interest rates for ISAs, and Santander is permitted to adjust its rates for some ISA products as it sees fit.
Santander ISAs cover cash and stocks and shares products, the former of which are ideal for shorter-term exposure and the latter of which are designed for investing for five-plus years. The Santander ISA that’s right for you depends on factors, not the least of which includes when you intend on accessing the savings.
Pro: Established and trusted leader in banking
Pro: First mover among banks for competitive rates in Santander ISAs
Pro: Nimble rate structure for some Santander ISAs that can increase in a rising interest rate environment, which we appear to be entering.
Con: Withdrawals redeposited into a Santander ISA count toward the 2017-2018 ISA limit, which isn’t the case for all providers.
Con: Rates can fall in response to industry and market conditions with only 14 days’ notice.
Con: Santander offers no innovative finance or lifetime ISAs.
Easy as 123
Santander actually has a 123 product, which is currently paying 1.5% on balances up to GBP 20,000. This account is separate from a Santander ISA but by holding an account leads to greater benefits for the saver. We’ll get into that later.
As the name suggests, the Santander Easy ISA, which has been around since 2002, is accompanied by simple features. It’s a cash ISA, which means that savings are accumulated on a tax-free basis. Savers can earn an interest rate between 0.10%, which is undeniably low, and 0.25% annual equivalent rate (AER) (variable) based on the account balance. The higher the account balance, the higher the rate. And whilst interest is calculated every day, it’s added to the account on an annual basis.
So, for instance, with an account balance of GBP 1,000, a saver would interest of GBP 1.00 over the course of 12 months. With a GBP 40,000 balance, however, the savings jumps to GBP 100 in the same period, leading to a balance of GBP 40,100.
Go ahead and transfer funds over from another cash ISA, including another Santander ISA, but there is a downside, at least for Santander. The easy transfer means that if you find a higher rate from a competing bank you may decide to leave the Santander Easy ISA for a competing product. And there are limitations. For instance, ISA savings from a spouse who has died cannot be transferred to the Santander Easy ISA.
Something for savers to keep in mind is that by depositing less than the ISA allowance of GBP 20,000 in the current 2017/2018 tax year, they might think they can still attain the tax-free allowance by directing the balance into another cash ISA vehicle. Unfortunately, this is prohibited, so a deposit below the ISA allowance means you won’t maximize your tax savings this year.
Santander ISAs have account management covered. In addition to mobile and online banking Santander is also able to offer some traditional options for account management thanks to its physical locations sprinkled around the country. Savers can visit a physical branch, speak with a live operator via telephone or access cash machines, for example.
Pro: No minimum deposit required
Pro: Mobile friendly app
Pro: Transfer funds between ISAs at any time.
Con: Low balance = low rate
The Santander e-ISA bumps up the interest rate from the Santander Easy ISA and here’s where it pays to be a Santander 123 World or Santander Select customer. The interest rate for the Santander e-ISA is 0.35% but for an account holder of the above-mentioned products the rate jumps to 0.60%. On the flipside, there’s a minimum balance of GBP 500 compared to no minimum balance for the Santander Easy ISA.
The Santander e-ISA, as the name would suggest, is more digital driven than the Santander Easy ISA. To open a Santander e-ISA account a saver must either have an online or mobile account or plan to open one. Savers can still, however, visit a physical brick-and-mortar bank location to open a Santander ISA. Like the Santander Easy ISA, any withdrawals from the Santander e-ISA lose their tax benefits and even if paid back will go toward the GBP 20,000 allowance. Competing banks may waive this standard.
There are limitations on how savers can subscribe their ISA allowance. Subscribing to the Santander e-ISA means a saver can’t subscribe to another Santander cash ISA such as the fixed rate ISA, variable rate ISA and Help to Buy ISA for the 2017-2018 tax year.
Santander e-ISA subscribers may, however, by law subscribe to other products including cash and stocks and shares ISAs as well as products not offered by Santander ISAs including innovative finance and lifetime ISAs.
Pro: Higher interest than a Santander Easy ISA
Con: If you have a change of heart, you must wait 14 days from opening your Santander e-ISA to close the account
Con: Even though UK regulators allow ISA flexibility, Santander opts not to offer the feature allowing savers to withdraw money without losing the tax benefits.
Santander takes a tiered approach to interest rates on the 2-year fixed rate ISA that for the current tax year ranges between 0.55% to 0.80%, the higher end of which applies to 123 World or Santander Select customers, who are typically the bank’s wealthier clientele. The top end of the range isn’t the highest rate that Santander ISAs have paid. The Spanish bank has offered competitive rates on this product before, which suggests that in a different rate environment they would do it again.
Similar to its other products Santander calculates the interest daily but adds to the account balance yearly on Nov. 1.
To open a Santander 2-Year Fixed Rate ISA, presuming you are a UK resident at least 16 years of age, you must begin with an opening balance of GBP 500. If you happen to be transferring your balance from another ISA that carries a balance of the amount, the balance requirement is met and there’s no need to deposit an additional GBP 500.
Partial withdrawals are prohibited. The only way to access your money early is to close the account, which activates a fee for 120 days’ worth of interest. Think twice before closing your account, as you lose the tax friendly status and if you redirect the funds into another ISA the deposit will go toward this tax-year’s ISA allowance.
Keep in mind that if you decide to lock yourself in to Santander’s 2-Year Fixed Rate ISA, it’s a cash ISA. If you deposit funds below the GBP 20,000 ISA allowance, say, GBP 10,000, you can’t direct the remaining GBP 10,000 into another cash ISA and still receive the tax benefits.
Santander offers a solid 2 Year Fixed Rate ISA with a more generous rate for select customers. The bank might not have the highest rates in the industry, but savers will likely have to jump to a niche-oriented bank such as the mobile-driven Atom bank, which is designed for mobile customers only – targeting millennials. Plus, Atom is still considered a startup, so there’s a host of risks there that aren’t a factor when you’re investing with an established player such as Santander.
Pro: This Santander ISA has a fixed rate locked in, and as a result the bank can’t change the rate in the two-year period
Pro: Except for a higher interest rate, non-Santander banking customers get the same features as 123 World and Santander Select clients
Con: Santander has a deadline of Nov. 30, 2017 for deposits into this product.
The Santander Stocks and Shares ISA ushers in the intersection of saving and investing as well as tax efficiency with the benefit of potentially higher returns from the stock market. Of course, this means that investors also gain exposure to greater risk, which is a factor that should weigh into the saver’s risk/reward profile and time horizon for investing. For instance, someone who is saving for retirement might take a more conservative approach than someone who is only beginning to plan for the future, but this is only an example.
The Santander Stocks and Shares ISA gives investors the ability to access a host of financial products, including exchange-traded funds, or ETFs. While ISA allowance limits still apply, investors can take advantage of Santander’s investment account option for more deposits. And given the vast resources of a global company such as Santander, investors can also receive financial advice or perhaps choose to go the robo advisory route.
One way that savers choose to access this product is via robo advisors for their low fees and competitive results over time. In fact, time is key as the Santander Stocks and Shares ISA is for someone with a longer investment horizon than that of a Santander cash ISA.
Investors in the Santander Stocks and Shares ISA gain access to some 1,300 investment funds via the Santander Investment Hub. The Hub also gives investors a level of autonomy to make their own investment decisions, if you’re so inclined.
You can expect to pay additional fees for the Santander Investment Hub, based on reports. The fee structure also appears to be tiered so that the higher your balance the lower the fee you will be required to pay. As of 2016, the fees on the Hub ranged from 0.35% to 0.1% for assets of up to GBP 50,000 and more than GBP 500,000, respectively.
Pro: Santander has been known to offer cash-back deals tied to this product, as recently as March 2017 when investors were awarded as much as GBP 100 for investing over a period of a few months. While that incentive has ended it demonstrates Santander’s willingness to reward new and existing customers.
Con: Some label the cashback program a con, saying that in deals like these investors end up paying for the cash-back reward in one way or another.
Santander may not offer the highest ISA rates in the industry, but it’s competitive among other leading High Street banks. If you prefer the assurance of an established Spanish bank with a 160 years’ worth of history (Santander was founded in 1857) over a fintech startup, then this less risky suite of products could be right for you. Like it or hate it, Santander ISAs provide a level of transparency that gives savers the benefit of expectation, which is more that can be said for some other financial products. And for those investors who qualify to open a Santander ISA through a robo advisor, you will find added benefits to investing in the Santander Stocks and Shares ISA, which is their sweet spot for ETF investing.