With a historic low of 0.93 per cent returns, cash Isas’ popularity has continued to dwindle.
Cash Isas experienced their worst year on record in 2017, with average returns at a historic low of 0.93 per cent, according to Moneyfacts. In contrast, the average stocks and shares Isa returned 11.75 per cent.
Cash Isas have been a popular go-to savings account for people who are looking to take advantage of their tax-free allowance, but since the Bank of England cut interest rates to 0.5 per cent in March 2009 cash Isa rates and savings rates generally have dwindled.
More recently, though, cash Isa rates gave become less generous than other savings accounts. As a result, the number of cash Isa accounts subscribed on an annual basis fell by 1.6 million, from 10.1 million in 2015/16 to 8.5 million in 2016/17.
One big driver behind this has been the introduction of the personal savings allowance, which allows basic rate taxpayers to receive £1,000 of cash interest tax-free each year. Higher rate taxpayers have a lower allowance of £500.
Since the personal savings allowance came into effect, the cash Isa tax break has become less relevant. Savers can now have £100,000 in a taxable account offering 1 per cent interest and will not have to pay a single penny of tax.
Another factor at play is the fact that taxable savings accounts have for some time now been offering higher rates compared to cash Isas. For instance, Springall points out the best easy access Isa today pays 1.16 per cent from AA, while their best easy access account pays 1.32 per cent.
However, given that statistics released this month show inflation stands at 3 per cent, savers’ cash continues to lose value in both types of accounts.
Rachel Springall, finance expert at moneyfacts.co.uk, says: ‘The tax-free Isa allowance may remain at a respectable £20,000, but while the Personal Savings Allowance remains in place, savers could get higher interest on savings accounts away from Isas without paying tax.’
Sarah Coles, personal finance analyst at Hargreaves Lansdown, agrees savers can find better deals elsewhere. She says ‘a dark cloud’ has been hovering over the cash Isa market for years now, due to the low interest rate environment. Another factor, Coles point out, has been the availability of cheap money for banks from the government – through Funding for Lending Scheme.
‘Banks could borrow from central government at close to base rate, so there was no need to offer competitive savings rates in order to attract money from savers,’ she adds.
However, for those who are looking to park their money in a savings account rather than investing it, she adds that there is still a strong argument in favour of cash Isas because they offer long term protection from tax.
She adds: ‘Using your Isa allowance this year permanently shelters the money from tax, whereas relying on the personal savings allowance means putting your faith in a policy that could change at any time.’
Find the best savings rates here.
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