Cash ISA Season Limps into Action, with Very Few Contenders

By: MoneyFacts

It’s been a very slow start to the ISA season, as the latest research from Moneyfacts.co.uk reveals that the average ISA rate has continued to fall to a new low of 0.82%. While there have been gradual increases to the ISA allowance over the years, the market remains deprived of intense competition.

In fact, even if savers maxed out the full £15,240 allowance, they would earn just £124.97 based on the average ISA rate of 0.82%, whereas ten years ago, they could have earned more on a £3,000 investment, as the average rate then stood at 5.06% (see the table below).

This demonstrates how vital it is for savers to chase the Best Buys so they can get the highest returns, which will be particularly important when the ISA allowance rises to an enormous £20,000.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“It’s obvious to see that cash ISAs are not paying anywhere close to those accounts with no tax-free wrapper, but this is mainly because not all challenger banks offer an ISA equivalent – and those are the institutions offering the most competitive accounts at the moment. Luckily, Paragon Bank, one of the few who have improved ISA rates in recent weeks, now pays a market-leading 1.05% on its variable rate ISA and also grabs the top spot for the best five-year fixed ISA rate at 1.75%.

“The ISA allowance is there to use it or lose it, so it’s important to go over any old accounts to see whether they need to be transferred to something better, especially as some ISAs pay little to nothing in interest, going as low as 0.01%. Today, most ISAs (70%) pay less than 1% and there are no ISAs which can beat the current level of inflation (1.80%). In contrast, a year ago 85% of the ISA market paid 1% or more.

“Whilst savers wait with bated breath for some ISA rate rivalry, they shouldn’t wait too long to grab a good deal; keeping on top of the Best Buys is a must. ISAs have not been left unscathed by rate cuts, with some having fallen by as much as 0.65% since the start of the year, and providers could still pull some of the most competitive rates from sale so that they can cope with demand.

“It’s still early days as to whether the Lifetime ISA will be a well-received addition, as it will likely appeal only to certain individuals and may cause confusion or complaints amongst consumers. In the meantime, a Help to Buy ISA is still a must for any first-time buyer saving up for a deposit, as they can get a 25% bonus from the Government or withdraw their cash without penalty should their plans change. They also offer much higher returns compared to standard cash ISAs.

“Clearly, it’s becoming increasingly tough for consumers to take ISAs seriously when there are far superior savings rates available on accounts without a tax-free wrapper. The Personal Savings Allowance has hit cash ISAs hard, but it’s worth remembering that the PSA might not be around over the longer-term. Those savers looking for better returns may want to consider Stocks & Shares ISAs, though they must be aware of the risks involved.”

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