Rates hit new lows in cash Isa washout: Savers set for far worse returns on this year’s savings
Savers will get far worse returns on this year’s cash Isa savings.
Rates are far below the level of a year ago, having fallen by more than the 0.25 point cut in base rate in August.
You have until April 5 to use all or part of your cash Isa allowance of £15,240 for this tax year. Interest is automatically tax-free and does not affect your tax code.
Savers seem to have fallen out of love with cash Isas, which once held pride of place among accounts, despite their tax-free status.
Cash Isa rates are far below the level of a year ago, having fallen by more than the 0.25 point cut in base rate in August
In the past 12 months they have put in £5.4 billion; less than half last year’s £14 billion.
The fall comes despite a 4 per cent rise in the amount going into all deposit accounts.
The blame lies with a toxic combination of ultra-low interest rates, the arrival of the £1,000 tax-free personal savings allowance on non-Isa accounts and the fact that the big banks do not want your money.
Banks and building societies have traditionally tried to leapfrog each other and offer top rates to woo savers into cash Isas towards the end of the tax year, but this time there has been only a trickle of new accounts with miserly rates.
Providers that historically paid well have cut their rates harshly. Coventry Building Society Easy Access rate is down 0.5 points at 0.9 per cent and M&S Advantage Isa offers 0.5 per cent, down from 1.3 per cent last year, more than three times the fall in base rate.
Nationwide FlexAccount is down to 0.75 per cent from 1.3 per cent and National Savings & Investments is down 0.5 per cent at 0.75 per cent from May 1.
Last year, Yorkshire BS offered new savers 1.35 per cent; this year it’s 0.65 per cent.
The top deal is Paragon Bank internet account’s 1.05 per cent. In the High Street, Coventry BS Easy Access Isa 5 and Skipton Bonus Isa pay 0.9 per cent. Skipton’s deal includes a 0.25 point bonus for the first 12 months.
Virgin Money Defined Access Cash Isa pays 1.01 per cent, but to earn this rate you are allowed to make only three withdrawals a year.
Check whether you can add to your existing cash Isa if it pays a good rate. For example, Coventry BS will let you add to its Branch Instant Isa, closed to new savers, which pays 1.4 per cent.
The best fixed rate, one-year deal is 1.05 per cent from Virgin Money. Leeds BS pays 1.01 per cent and Aldemore Bank and Saga 1 per cent. For two years, Principality BS pays 1.26 per cent.
Paradoxically, you can earn more in a taxable account. New banks, keen to attract savers’ money, have raised rates on fixed-rate bonds and easy-access accounts, albeit from a low level.
As they tend not to offer cash Isas, rates are rock bottom. However, since last April, by using their personal savings allowance, basic-rate taxpayers don’t pay any tax on the first £1,000 interest from taxable accounts each tax year. Higher-rate payers get £500.
At 1 per cent you can have £100,000 in taxable accounts and not pay tax on your interest as a basic-rate payer.
Experts warn against this tactic and favour using your cash Isa allowance. If you don’t use it one year, you can’t carry it over to the next.
They argue that when rates do start to rise, you could face a tax bill you could have avoided.