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Cash ISA Rates Halve Over 5 Years

Interest rates on cash ISAs accounts have fallen to the lowest on record. Figures from Moneyfacts.co.uk show that the best easy access ISA rate has halved over 5 years

Kara Gammell 10 March, 2016 | 11:50AM

With less than one month left of this tax year time is running out for ISA and pension investors – or anyone looking to boost their savings and reduce their HMRC bill. Read our Guide to ISAs, Pensions and Tax-efficient investing to make sure you don’t get left behind.

Individual savings accounts (ISAs) have long been the ‘go-to product’ for savers in which to stash their hard-earned cash, as they offer not only tax benefits but some of the most competitive rates on the market. However, with interest rates on these accounts falling to the lowest on record, many savers are starting to wonder whether they are worth the investment.

Relying on the personal savings allowance is a gamble; eventually rates will go up

Figures from Moneyfacts.co.uk show that the best easy access ISA rate, for instance, has dropped to just 1.41%, while the top five-year account offers just 2.6% - both nearly half of the rates on offer five years ago.

What’s more, the new Personal Savings Allowance (PSA), which means £1,000 of interest earned will be tax-free come April, seems to have only exacerbated the downward slide in rates.

“This time of year is when many providers start to vie for savers attention with some attractive new rates, sadly this has yet to happen, making this perhaps one of the worst ISA seasons to date,” said Charlotte Nelson, spokesman at Moneyfacts.co.uk.

With such paltry rates on offer, it’s no wonder savers a starting to question whether an ISA is for them particularly if they only have a small amount to save and many are opting for a current account to hold their funds. Not only do many offer high rates of in-credit interest – with current deals offering as much as 5% – but many providers offer generous cash incentives to encourage consumers to switch.

However, those who chose to opening a new current account specifically for saving must remember that some require a minimum monthly funding or number of direct debits to be set up before they can benefit from the interest.

Savers May Lose Interest in ISAs

“As we near the end of the tax year when providers generally launch their leading deals, we’ve yet to see anything worth writing about and time is simply running out,” said Susan Hannums, director at SavingsChampion.co.uk.

“It’s sad state of affairs so it would be no surprise if savers were to almost completely lose interest once the new Personal Savings Allowance comes into force.”

However, financial experts warn that relying on the PSA alone for your tax-free savings is a gamble; eventually rates will go up, and the capital amount savers can deposit and earn interest on tax-free will subsequently diminish.

According to calculations from SavingsChampion.co.uk, savers in the best easy access account, paying 1.55%, offered by RCI, will breach the PSA with a savings pot of more than £64,516 for a basic rate taxpayer, or £32,258 for a higher rate tax payer. However, the current best easy access Cash ISA rate is lower at 1.45%, but savers could have amassed £86,280 in Cash ISAs and that’s not even including interest earned. With average interest included this could be closer to £100,000, fully tax-free.

Where Can Savers Find the Best Interest Rates?

But if you are committed to sticking your savings in an ISA to maximise the tax-free allowance, where should savers look for the most competitive rates?

Taxpayers on the hunt for a best-buy easy-access cash ISA should look to Virgin Money’s Defined Access E-ISA Issue 5 which pays 1.41% and accepts transfers. This account requires a minimum deposit of just £1 and is operated online only. However, savers must bear in mind that the rate reverts to 0.75% if four or more withdrawals are made in a calendar year, then the lower rate applies for the remainder of that year.

For savers who are looking to fix their cash ISA rate, Virgin Money’s 1 Year Fixed Rate Cash E-ISA Issue 166 tops the best buy table with a rate of 1.5%. This account requires a minimum deposit of £1, accepts transfers in and is operated online. However, withdrawals are allowed subject to 60 days loss of interest. Interest paid annually on 5th August or monthly on the last working day of each month and the account maturity date is February 24, 2017.

If you want to lock your money up for the medium term, why not check out Aldermore Bank’s Three Year Fixed Rate ISA paying 1.85%?

This account requires a minimum deposit of £1,000, accepts transfers in and is operated online, by post or over the telephone. Withdrawals are allowed subject to 180 days loss of interest. On maturity account transferred to 30 Day Notice Cash ISA. While those who prefer a longer fixed term should check out UBL’s Five-year fixed rate cash ISA which pays 2.33%. This account accepts transfers in, must be operated by post or in branch and pays interest quarterly, monthly, annually or on maturity. Interest cannot be compounded unless it is paid on maturity. Access is allowed on closure or full transfer out only, subject to 365 days loss of interest.

What About Junior Savers?

If it is a junior ISA that you are after, Nationwide Building Society and Coventry Building Society both top of the best buy table with a rate of 3.25%. Parents that have an existing Halifax ISA account can better these rates by opting for the bank’s Junior Cash ISA, which pays 4%.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Kara Gammell

Kara Gammell  is a freelance journalist and author, specialising in personal finance and consumer issues, writing for Morningstar.co.uk