Why some pensioners are shunning cash ISAs this year – and the alternative accounts quietly paying more

In a quiet cul‑de‑sac in Derby, Margaret, 73, opened yet another letter from her bank. Her “loyalty” cash ISA, built up over years, was paying barely more than 2%. On the same page, the bank invited her to move money into an ordinary savings account at almost double the rate – but with no ISA wrapper.

For years she had been told never to touch her ISA. “Once it’s out, you can’t put it back,” the adviser had warned back in 2009. The tax‑free halo stuck. But when her son sat down with a calculator and the latest tax rules, the conclusion was blunt: she was clinging to the ISA label and quietly losing income every month.

Across the country, many pensioners are discovering the same thing. The accounts with the comforting “cash ISA” badge do not always offer the best deal any more, especially for savers on modest incomes. The surprise is not that some are moving – it is where they are moving to.

Why some pensioners are stepping away from cash ISAs

Cash ISAs used to be the automatic home for savings. When interest rates were higher and every pound of interest was taxed, putting money in a tax‑free wrapper was a simple win. Once inside, the interest stayed free of income tax year after year.

Two big shifts have quietly changed the maths:

• Interest rates have risen from rock‑bottom levels, so the difference between a poor rate and a good one really bites.
• The government introduced new tax breaks on savings interest outside ISAs, which many pensioners never fully heard about.

Let’s be honest: almost no one checks the fine print of their tax allowances every April. The habit of “ISA first, everything else later” has simply carried on – even when it no longer fits how some retirees actually pay tax.

The tax rules that changed the picture

Three pieces of the system matter for pensioners:

• Personal Allowance (currently £12,570): income (such as State Pension, private pensions, wages) up to this level is tax‑free.
• Personal Savings Allowance (PSA): on top of that, most people get a tax‑free chunk of interest:
  • Basic‑rate taxpayers: up to £1,000 of interest a year tax‑free.
  • Higher‑rate taxpayers: up to £500.
  • Additional‑rate taxpayers: £0.
• Starting rate for savings: if your non‑savings income (pensions, wages) is low, you can get up to an extra £5,000 of savings interest taxed at 0%.

For a lot of pensioners with only the State Pension and a modest private pension, this leads to a quiet but powerful outcome: they can earn a fair amount of interest in ordinary savings accounts with no tax at all, even without using a cash ISA.

This is where the sums surprise people.

At an interest rate of 5%:

• Earning £1,000 of interest (the full PSA for a basic‑rate taxpayer) means having around £20,000 in savings.
• If you also benefit from some of the 0% “starting rate for savings”, you can hold significantly more than that before tax ever appears.

If your total interest is well below your tax‑free limits, the ISA wrapper adds no extra tax benefit in the short term. What really matters then is the interest rate itself.

When a cash ISA still makes sense

This does not mean cash ISAs are “finished”. They are still useful tools – just not in every situation, and not automatically.

A cash ISA is likely to be worth keeping or opening if:

• You are a higher‑rate or additional‑rate taxpayer in retirement and your savings interest would push you over your PSA.
• You hold large cash balances (often £20,000–£30,000 or more) and current rates would push your annual interest beyond your tax‑free allowances.
• You want to build a long‑term tax‑free pot that you may later switch into investments (Stocks & Shares ISA) without using extra allowance.
• You already have a competitive ISA rate similar to the top ordinary savings accounts and do not want the admin of moving.

There is also a psychological side. Some savers like having ISA money “quarantined”, mentally labelled as “do not touch” funds, separate from day‑to‑day cash. That boundary can be valuable, even if the pure tax maths is marginal.

But for pensioners on modest taxable incomes and modest savings, the tax angle is often less dramatic than they were led to believe a decade ago.

The quiet winners: ordinary savings accounts paying more

In the current market, many of the very best interest rates are not on cash ISAs. Banks and building societies frequently offer their top rates on:

• Standard easy‑access savings accounts.
• Notice accounts.
• Fixed‑rate bonds.
• Regular savings accounts linked to a current account.

Part of the reason is simple cost. Running ISA balances is administratively more complex for providers, so they do not always reserve their sharpest offers for ISA savers. A bank may pay, for example, 4.8% on its top easy‑access account but only 4.2% on its equivalent cash ISA.

If you are not paying tax on your interest anyway, that extra 0.5–0.6 percentage points can be worth far more than the ISA label. On £20,000 of savings, a 0.5% gap is £100 a year – every year.

Types of accounts pensioners are switching into

Here are the main alternatives many retirees are quietly using instead of, or alongside, cash ISAs:

• Easy‑access savings
  • Pros: instant access, simple to understand, some top rates available.
  • Cons: rates can be cut at short notice; bonus rates may drop after a year.
• Notice accounts (e.g. 30, 60, 90 days)
  • Pros: often slightly higher rates than easy‑access; still relatively flexible.
  • Cons: must give notice to withdraw; early access penalties if you do not.
• Fixed‑rate bonds (1–5 years)
  • Pros: usually higher guaranteed rates for the term; good for money you will not need soon.
  • Cons: poor access; you may be locked in if rates move; early closure can be impossible or costly.
• Regular savers
  • Pros: very high headline rates on monthly deposits; good for drip‑feeding spare income.
  • Cons: balance is capped and builds slowly; usually requires a linked current account.

A parallel favourite, especially among older savers, remains NS&I Premium Bonds. These do not pay a set interest rate but offer tax‑free prize draws instead. For some, the chance element and backing by the government feels more comfortable than chasing an extra fraction of a percent elsewhere.

“At 75, I care more about steady income and simple accounts I can understand, not a new deal every three months,” says a retired engineer in Leeds. “If that means an ordinary saver at 5% instead of an ISA at 4%, I’ll take the 5%.”

How to check if an ISA is still pulling its weight

The practical question is not “Are ISAs good or bad?” but “Is this particular ISA, for me, this year, doing a useful job?”

A quick three‑step check can help:

1. Add up your expected income this tax year
   • Include State Pension, private or workplace pensions, any part‑time earnings and rental income.
   • See whether you are likely to use up your Personal Allowance (£12,570 for many people).
2. Estimate your savings interest outside ISAs
   • List all non‑ISA savings: bank accounts, building society accounts, Premium Bonds “expected value” if you want to be thorough.
   • Multiply by a rough current rate (e.g. 4% or 5%) to get a ballpark annual interest figure.
3. Compare that figure with your tax‑free allowances
   • If your estimated interest is comfortably below your PSA (and any 0% starting‑rate band you benefit from), extra ISA shelter may not save tax this year.
   • If your interest is above those levels, ISAs may well still be protecting you from a real tax bill.

You do not need a spreadsheet. A back‑of‑an‑envelope number is enough to see whether your ISA is really working hard or just coasting.

Safety, guarantees and what to watch for

For many pensioners, safety and simplicity matter as much as the headline rate. Two practical checks go alongside any decision to move money:

• FSCS protection: most banks and building societies in the UK are covered by the Financial Services Compensation Scheme, which protects up to £85,000 per person, per banking group in eligible accounts. Spreading larger sums across different groups can increase protection.
• Account conditions: bonus periods, withdrawal limits, notice periods and linked‑account requirements can all affect the real return and flexibility.

A small extra gain in interest is not worth sacrificing sleep over complex rules you are not comfortable with, or moving into products you do not fully understand. Nor is it worth responding to unsolicited calls, emails or texts about “exclusive” high‑interest offers – a hallmark of scams.

A simple comparison of mainstream, FSCS‑covered accounts can often deliver most of the benefit with far less stress.

At a glance: common options for pensioner savers

Account type	Typical rate band*	Access to money
Cash ISA	Slightly below top ordinary accounts	Varies: easy‑access or fixed
Easy‑access savings	Among highest easy rates	Same‑day, usually instant
Fixed‑rate bond	Often higher than easy‑access	Locked in for 1–5 years

*Rates change frequently; check up‑to‑date comparisons before moving money.

A simple rule of thumb for this tax year

For many pensioners, one practical shortcut emerges:

• If you are a basic‑rate taxpayer with total savings under roughly £20,000–£25,000, and you have no other large sources of interest, you may be able to focus on the best rates, even outside an ISA, without triggering tax.
• If you have much larger cash savings, or pay higher‑rate tax, using your ISA allowance (up to £20,000 a year) can still be a powerful way to protect interest from tax – as long as the ISA rate itself is competitive.

The right mix might be a blend: keeping an existing good‑rate cash ISA for part of your pot, while sending new money, or transfers from very low‑rate ISAs, into higher‑paying non‑ISA accounts until your tax‑free allowances are used.

The key is to update habits formed in a very different interest‑rate world. The label on the account matters less than what lands in your bank over the year.

---

FAQ:

• Should I empty my old cash ISA to get a better rate?
  Not automatically. First, check your ISA’s current rate and whether a better‑paying ISA can accept transfers. If all ISA options are poor and you are unlikely to pay tax on extra interest, moving some or all of the money to a high‑rate non‑ISA account can make sense – but once withdrawn, that past ISA allowance is gone.
• Is moving from an ISA into a normal savings account risky?
  In terms of capital safety, an ordinary savings account with an FSCS‑protected bank is just as safe as a cash ISA with the same provider. The main difference is tax treatment and, often, the interest rate. The risk is more about future tax changes and discipline, not the security of the money itself.
• What if interest rates fall again?
  If rates drop, the gap between different accounts may shrink, and the value of the PSA falls in cash terms. ISAs may then regain relative appeal. Reviewing your position once a year – rather than chasing every move – is usually enough.
• Are Stocks & Shares ISAs better than cash for pensioners?
  They can offer higher long‑term growth but come with investment risk: values and income can fall as well as rise. For money you might need within the next five years, many advisers still suggest keeping it in cash, whether inside an ISA or not.
• Is this personal financial advice for my situation?
  No. This is general information based on current rules at the time of writing. Tax treatment depends on your individual circumstances and may change. If large sums or complex incomes are involved, consider speaking to a regulated financial adviser or tax professional.