Savers abandon fixed cash Isas
SOARING numbers of savers are ditching tax-free cash Isas in favour of ordinary accounts because they pay better.
The gap between the top fixed- cash Isa rates and one-year savings bonds has soared since the start of the year.
In January the best one-year fixed-rate account paid 1.8 pc, while the top fixed-rate cash Isa paid 1.41 pc — a 0.39 percentage point difference. Today the gap has widened to 0.48 percentage points.
PCF bank currently pays the best rate on a one-year fixed bond at 2.03 pc. By comparison the best one-year cash Isa rate is 1.55 pc with Paragon Bank. It means savers now miss out on £48 interest a year on each £10,000 by going choosing an Isa rather than a bond.
On two-year deals, the gap is up from 0.41 to 0.54 points with the top Isa rate at 1.75 pc from Shawbrook against 2.25 pc with Tandem Bank’s two-year bond.
In the last tax year to April 2018, savers took out 7.7 million cash Isas — an 8 pc drop on the previous year, according to latest HM Revenue and Customs figures. Experts blame an increasing lack of interest in Isas on low interest rates and the introduction of the personal savings allowance in 2016.
It means basic-rate taxpayers do not have to pay tax on the first £1,000 of interest they earn from ordinary savings accounts. Higher rate tax payers have a £500 allowance.
With rates so low, savers rarely exceed this allowance — in fact 98 pc of savers currently pay no tax on their ordinary savings.
It means they have little need for a tax-free Isa. The hike in the amount you can put in a cash Isa each tax year has also played a part in killing off the need for an Isa. With a high annual limit of £20,000, few savers need to rush to open an account each year.
If they miss out this year, they have another £20,000 allowance from the next tax year starting the following April. Between April 2016 and 2017, the first year the personal savings allowance was operational, the amount of cash held in Isas limped up by just £2 billion, a rise of less than 1 pc from £268 billion to £270 billion. In the previous year, balances rose by a much higher £14 billion or 5.5 pc.
The average amount savers put in also tumbled from £5,801 to £4,622 over the same period, while the annual Isa allowance remained static at £15,240.
In the last tax year (2017 to 2018) when the allowance rose 31 pc to £20,000, the average sum put in still only rose by 10 pc to £5,114.
But experts warn against ignoring cash Isas altogether. As rates rise savers will use up personal savings allowances more quickly.
At present you can have £76,000 in the best easy-access ordinary account at 1.3 pc from RCI Bank or Shawbrook Bank and pay no tax on £988 interest. If the rate rises to 2 pc, you’ll start to pay tax at £50,000. In the top oneyear fixed-rate bond at 2.03 pc you can have £49,000 without busting your £1,000 allowance — at 3 pc this figure drops to £32,000.