Savers pull £3.7 bn out of fixed bonds
Sylvia Morris
SAVERS have abandoned tax-free cash Isas and fixed-rate bonds in favour of the humble easy-access account.
Low interest rates and a growing expectation among savers that rates will soon rise is behind the exodus, experts say.
Suffering savers want to be ready to move to better rates when they finally arrive.
It’s thought that the little bit extra they forgo by not going for a fixed deal, which pay slightly higher rates, is a small price to pay for this flexibility.
Experts differ on when the Bank of England base rate will rise from its historic 0.25 pc low. Some say we will have to wait another 18 months.
So far, only one small building society has come up with a solution. Last week, Family BS launched an online two-year Tracker Bond at 1.81 pc. If base rate rises during the term, then your rate will go up, too.
An unprecedented £504 million flowed out of cash Isas between the beginning of the tax year in April and the end of July.
A further £3.7 billion has come out of fixed-rate bonds in the same four months. But £13 billion has found its way into ordinary easy-access accounts, Bank of England figures show.
Patrick Connolly, from independent adviser Chase de Vere, says: ‘Some savers think the extra they earn by tying their money up in a fixed-rate bond is not worth it, so they go for an easy-access account.’
The best one-year fixed rate is 1.95 pc from Atom Bank.
Saving £10,000 in this account will earn you just £70 a year more than if you go for the top easy-access account at 1.25 pc. If you fix for two years, you can get £80 extra with Paragon Bank.
The ordinary easy-access account is more popular than tax-free cash Isas, once the first port of call for savers, because they used to pay better rates.
The best easy-access cash Isa rate is 1.06 pc, 0.19 percentage points below the best ordinary easy-access account. These noncash Isas are taxable, but few savers pay tax on their interest because rates are so low.
Money Mail warned last year that cash Isas would collapse because of the double-whammy of low interest rates and the arrival of the personal savings allowance in April 2016. Announced two years ago by then-Chancellor George Osborne, it spares savers from paying tax on the first £1,000 of interest in any account as basic-rate payers (£500 for higher-rate taxpayers). At 1.25pc, a basic-rate payer can have £75,000 in a taxable account and stay within their allowance. The number of cash Isas opened in this tax year, which runs until April 5, 2017, fell by 1.6 million from the previous year, figures from HM Revenue & Customs show. Capital Economics expects a 0.25 pc base rate rise in the second quarter of next year. The Centre for Economic and Business Research says it will come towards the end of next year, while Pantheon Macroeconomics is holding out until the second quarter of 2019. Last week, a senior Bank of England official said rates must rise to stop inflation (currently 2.6 pc) spiralling out of control.