Isa or bond

A question about : Isa or bond

Can any one explain why a 5 yr fixed bond offers 3.18 % giving Ј31.80 before tax per Ј1000 which is what you get if you get this tax free

Or 5 yr ISA with the same bank gets 2.70% giving you a return of
Ј27.00 for the same thousand pound invested for the same period .

It seems to me that the bank is pocketing , Ј 4.80 per thousand of your tax savings from the government both these products allow no
Money to be withdrawn.

Best answers:

• It comes down to market forces. Banks and building societies and other borrowers need to get the lowest price money they can, to support their investments. Many people will pay a marginal rate of tax at 20% or 40% or 45% (or even 60% or other quirky rates) and so will only be receiving 2.54% or quite a lot less, off the 3.18% headline rate.
  If that is competitive with what their rivals are offering, and is the 'going rate', then they will assume that most of those customers would be happy being able to put limited amounts of cash with them for 2.7%.
  If they found that the ISA rate wasn't attracting as many customers as they'd like and they really wanted to get their hands on more customers' cash, they would increase the rate on either the ISA or the non-ISA bond or both. The fact that they haven't done that means that customers are satisfied enough. They could probably get more customers by offering 3% or 4% or 5% on the ISA but then they would be paying more money than they really need to get the cash in the door to run their business. So, they don't.
  So, they are not really 'pocketing money from the government'. They are simply relying on the fact that the government rules on giving tax advantages to individuals has split the market naturally into two for them, with two pools of money out there in the market to be grabbed by their two products. The rates they have to offer those two pools of customers are different due to market forces.
  The government isn't paying them Ј4.80 per thousand. You are letting them off 4.80 per thousand if you choose to lend them money at the lower rate. The simple solution is not to lend them money at that low rate, if you can instead find a better product out there (whether ISA saving, non-ISA saving, investment, etc).
  Some banks will give you 3,4,5% gross on limited amounts of money in an instant access account. So, putting limited amounts of money in a 5-year-locked-up account and not getting much better, if anything, once you've paid or not paid your taxes, may be futile.