Cash Isas are falling out of favour – but there are deals to be found if you can lock money away

It’s tough for savers: the best-paying easy-access cash Isas – from Virgin Money and Leeds building society – pay just 1.21% interest. Meanwhile, official data earlier this month showed that inflation remained high at 3% in January – meaning savers are losing money in real terms.

That may help explain why cash Isas have collapsed in popularity, with government data showing a £20bn fall in the amount invested in the space of 12 months.

However, rates do look to be on the move upwards. This week, the Bank of England governor, Mark Carney, told MPs there were likely to be “something more than three rate increases,” over the next few years.

Lloyds, meanwhile, is predicting the official interest rate will rise only gently, reaching 1.25% by 2020 (it’s currently 0.5%).

For the best rates, you need to lock your money away. Charter Savings Bank has a table-topping 2.25% (up from 2.11%) – but it is fixed for five years. Rates on its one-year and two-year versions were upped to 1.46% and 1.67% respectively. Virgin Money is offering 1.66% on its two-year fixed-rate Isa.

However, another reason why cash Isas are arguably out of favour is that some people now regard them as pointless. Since April 2016, the first £1,000 interest on any savings is tax free for a basic-rate taxpayer. For those on the higher rate, the threshold is £500. This is called the personal savings allowance and means most people no longer pay tax on savings interest. The only very strong argument in favour of cash Isas is that the money will be tax free indefinitely.

The alternative is shares-based Isas, and the choice is vast. Index trackers, which promise to match the gains (and falls) of indices such as the FTSE 100, can be one of the cheapest ways to access the stock market – fund managers include Vanguard, Legal & General and Fidelity. The fees can be low – often below 0.1% a year, and in some cases as low as 0.06%.