Savers in cash Isa exodus as squeeze bites

SAVERS are pulling money out of cash Isas at record levels due to rock-bottom interest rates and the cost of living crunch.

They withdrew an incredible £7billion from bank and building society Isas in the last three months of 2021.

Many have done it in protest at today’s dreadful rates, as the average interest paid on cash Isas more than halved last year to just 0.3 per cent in December.

As recently as 2019 they paid 1.4 per cent. Others will have had no choice as resurgent inflation forces them to raid their savings, even at the risk of depleting them altogether.

Rotten interest rates, soaring living costs and the dwindling appeal of cash Isas has driven the exodus, said Laura Suter, head of personal finance at AJ Bell: “These mark the biggest outflows from Isas since they were launched in 1999, up almost 46 per cent on 2020.”

The appeal of cash Isas has steadily dwindled as the big banks offer worse and worse rates, with savers paying in just £2.5bn in the final six months of last year, a fraction of the £15.6bn invested in 2014.

The Bank of England has now hiked interest rates twice in quick succession to 0.5 per cent, but the average cash Isa rate has fallen again to 0.26 per cent, while non-Isa deposit accounts pay 0.21 per cent on average.

The introduction of the personal savings allowance (PSA) in 2016 also dented the popularity of cash ISAs, as it meant the majority of savers in the UK no longer pay income tax on their savings interest, Suter said.

The PSA means that basic-rate taxpayers can earn £1,000 in savings interest before paying tax, while higher rate payers can earn £500. “Low interest rates mean that most people can amass significant cash savings before they pay tax on them.”

A basic-rate taxpayer earning 0.5 per cent in interest could have £200,000 in savings and still be covered by the allowance, while a higher-rate payer could have £100,000 before tax was due, Suter calculates. Additional45 per cent taxpayers get no PSA, so have more reason to consider cash Isas.

Increasing the Isa allowance to today’s £20,000 has also reduced the urgency of taking out a cash Isa before the annual April 5 deadline. Suter added: “Before that the allowance hovered around the £6,000 mark, giving people impetus to fill their cash Isa before the end of the tax year rather than lose it.”

With inflation at 5.5 per cent and expected to climb, many will be spending their cash rather than saving it, Suter added.

The only hope is that inflation drives up interest rates and boosts cash Isa returns, but Anna Bowes, founder of savings rate tracking service Savings Champion, said there is a long way to go.

Shawbrook Bank pays a best buy rate of 0.66 per cent with interest access, but that is far below today’s 5.5 per cent inflation rate. Savings rates should be rising but they are not, Bowes said. “Savers need to act now and move their money from providers who refuse to play fair.”