This year, so far, things have been pretty quiet on the Isa front. We explain why savers should not expect a cash Isa rate war to break out in the foreseeable future.
Savers have relatively little time to use their £20,000 cash Isa allowance for this tax year before the 5 April deadline. Around this time every year, banks and building societies generally bring out new accounts to tempt savers with better rates. But this year, so far, things have been pretty quiet on the Isa front.
This is partly down to the introduction of the personal savings allowance in April 2016, which lets basic-rate taxpayers earn up to £1,000 in savings income tax-free. Higher-rate taxpayers can earn up to £500.
This might not sound like a lot, but with rates so low, millions of savers can put their cash into non-Isa accounts with better rates without suffering a tax grab.
For example, savers sticking their full £20,000 allowance into the best one-year fixed rate Isa – 1.75% from Oaknorth Bank – would earn £350 interest for the year. Outside the Isa wrapper, the same sum in the top one-year fixed rate bond deals of around 2% would earn £400, well within the personal savings allowance.
This new allowance has also tempered banks and building societies’ appetite to lure Isa savers each April with competitive rates. The current climate is a long way from when cash Isas were the darling of the savings scene, offering attractive tax-free interest as a shelter from ordinary accounts in which your interest was automatically taxed.
When they were first introduced 20 years ago, the maximum that you could put in each year was £3,000 and rates were around 6%. Savers rushed to use their allowance each tax year to bag tax-free interest.
They were further spurred on by the low annual allowance. You needed to take advantage of each year’s allowance to build up a nest-egg in a tax-free fund. With the annual allowance now at £20,000, savers have much more leeway.
In the past few weeks, a handful of banks and building societies have edged up rates. Even so, rates on easy-access cash Isas are still below those on offer three years ago, before the arrival of the personal savings allowance.
The top rate then was 1.51%; now it is 1.45%. If Isa rates had kept pace with the general level of interest rates, banks and building societies should be paying 1.76%.
But experts say that cash Isas still have their place in any portfolio. Anna Bowes, director at savings advice site Savings Champion, says: “If you have a large balance in taxable accounts, or you are near to using up your personal savings allowance, a cash Isa makes sense. Rates are edging up and you could end up paying tax.”
Patrick Connolly, a certified financial planner at independent financial adviser Chase de Vere, adds: “If you want to put money into stocks and shares Isa but are nervous of markets right now, you can open a cash Isa and transfer the money later. You also need to make allowances for the fact that interest rates are currently very low. If they rise, you’ll use up your savings allowance more quickly and could face a tax bill down the line.”