Cash ISAs Falling Out of Favour With Savers

By: MoneyFacts

The Personal Savings Allowance (PSA) continues to take its toll on ISA returns, as it seems that savers are increasingly putting their cash elsewhere. Recently, the HMRC released statistics showing a decline in ISA subscriptions just one year after the PSA was introduced in 2016.

To coincide with these findings, the latest research from Moneyfacts.co.uk shows a stark difference between the returns that can be gained on cash ISAs and those on non-ISAs. Despite rates improving from a year ago thanks to last November’s base rate rise, the average ISA rate (1.18%) has fallen by around a third since 2013 (1.74%).

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

“The influence of the Personal Savings Allowance (PSA) continues to dampen the popularity of ISAs, so it is little wonder that subscriptions are falling. The amount of money placed into ISAs is also on the downturn according to the HMRC, which indicates that low cash rates could be putting off new savers.

“Some steps have been put in place to make ISAs more appealing, such as a large increase in the ISA allowance to £20,000 and a new rule allowing money taken out of an ISA to be replaced during the same tax year without consequences. Help to Buy ISAs, Junior ISAs, Innovative Finance ISAs and most recently the Lifetime ISA are also now around to appeal to different types of savers, while people are using stocks and shares ISAs more too.

“Savers who have stuck to ISAs will largely be able to move their older pots to take advantage of better rates, as according to our data 90% of Cash ISAs today allow transfers in from other Cash ISAs. While all these perks are clearly useful, the interest rates on Cash ISAs are still falling short of their non-ISA counterparts, which may be why the number of subscriptions to Cash ISAs fell by 1.6 million between the 2015-16 and 2016-17 tax years*.

“As 95% of people pay no tax on savings income**, there would no doubt be repercussions if the Government were to decide to pull the PSA, or even if interest rates were to rise considerably over the next few years. This is because customers using non-ISAs would then start being taxed on their savings income, whereas right now basic rate taxpayers get their first £1,000 in savings income tax-free per year. Savers would need a rate of 5.00% on a £20,000 investment to break this barrier.

“Rash changes could not just cause panic among savers, but also put pressure on ISA providers, who would then have to cope with a rise in consumer demand. It can only be hoped that both consumers and providers would be given some time to adjust if any changes were to be made.

“In the meantime, the ISA market could still do with an injection of better interest rates and more competition outside of ISA season, otherwise we could see even less subscriptions over the next few years as ISAs continue to fall out of favour.”

*HMRC ISA statistics April 2018. **Office of Tax Simplification report on simplifying the taxation of savings income May 2018.

moneyfacts.co.uk is a financial product price comparison site, launched in 2000, which helps consumers compare thousands of financial products, including credit cards, savings, mortgages and many more. Unlike other comparison sites, there is no commercial influence on the way moneyfacts.co.uk ranks products, showing consumers a true picture of the best products based on the criteria they select. The site also provides informative guides and covers the latest consumer finance news, as well as offering a weekly newsletter.

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