R.I.P CASH ISAS

Much-loved tax-free accounts killed by George Osborne’s savings revolution

AMONEY MAIL investigation today exposes how George Osborne’s savings tax revolution has destroyed t he cash Isa. The Chancellor sounded the death knell for cash Isas a year ago when he announced a new tax-free savings allowance. Savers were told that from April this year they will be spared tax on the first £1,000 of interest on any account.

We welcomed the move as a boost for the millions suffering miserly returns on their nest eggs. But we also warned that Mr Osborne’s revolution could kill off cash Isas, which would lose their appeal as a unique shelter from the taxman’s grasp.

Today, we can reveal that our worst fears have come true.

In the past year the big banks have slashed Isa rates by up to 40 pc for new savers as the deals have lost their marketing appeal. Rates have crashed so far that the returns are now lower than on taxable fixed-rate bonds and easy-access accounts.

And in another massive blow, Money Mail can reveal that major providers, including Santander RBS/NatWest and National Savings & I nvestments have all abandoned plans to make Isas flexible.

Despite the Government allowing banks to change their rules, these companies will keep blocking savers who try to take money out of an Isa then put cash back into it in the same tax year.

It is a cruel blow for millions of savers who have ploughed as much as £266 billion into these popular accounts since their launch in 1999.

The numbers opening accounts have rocketed from 4.5 million on launch to more than 10 million last year.

Customers were led to believe that Isas were the best place to store their cash — and had the best rates. But Mr Osborne’s changes have t urned conventional wisdom on its head.

Susan Hannums, director at independent savings adviser Savings Champion, says: ‘ Providers have lost interest in cash Isas and rates have been dropping like a stone. Savers will ask: “What is the point of cash Isas?”’

The personal savings allowance was the centrepiece of George Osborne’s Budget in mid-March last year.

It comes into effect on April 6 and lets every basic-rate taxpayer put their savings into a taxable account and pay no tax on the first £1,000 interest. For higherrate payers it’s the first £500 interest.

THE problem is it takes away the basic attractions of cash Isas — your tax-free interest. Once the darling of the savings industry, Isas were used by big banks to woo savers into putting cash into savings before the end of the tax year every April.

Rates are now so pitiful you can end up with more interest from the same money in a taxable account than from a cash Isa, thanks to the new personal savings allowance. Research shows rates for new savers in fixed-rate cash Isas began to fall in June, after the announcement of the personal savings allowance.

Last May, the average rate on a fixed-rate bond over all terms was 1.61 pc before tax against a similar Isa account at 1.71 pc. Now the average fixed-rate bond has edged up to 1.64 pc while the Isa rate has tumbled to 1.51 pc — a 12 pc fall. Your £15,240 annual cash Isa allowance will earn £230 in the cash Isa. Put it in a taxable account and this rises to £250 — well within the savings allowance. At 1.64 pc, you can put £60,000 into a fixed-rate bond and pay no tax as a basic-rate payer on the £984 interest. The top easy- access Isa from Post Office pays 1.45 pc while the best easy-access taxable account is 1.55 pc from French-owned RCI Bank.

Traditionally banks and building societies edge up rates on Isas at this time of year to entice savers looking to use their allowance. But this year has seen the exact opposite — cuts.

All the major providers including Halifax, Santander, Barclays, Lloyds Bank, RBS/ NatWest, HSBC, National Savings & Investments and Nationwide BS have slashed rates.

Halifax now pays 1.25 pc on a two- year fixed-rate cash Isa, a quarter less than 1.65 pc this time last year. Easy-access accounts are also down. For example Halifax Isa Saver Variable pays new savers 0.6 pc, 40 pc down on the 1 pc this time last year. Barclays Instant Cash Isa now pays 0.9 pc — 35 pc down on the 1.39 pc a year ago.

And some of the largest providers won’t offer the new flexible Isa which launches on April 6. Santander, National Savings & Investments and RBS/NatWest have all told Money Mail they will not.

Announced in the Budget last year, the flexible Isa rule lets you put in the full £15,240 allowance, take cash out and replace it later without affecting your tax-free entitlement.

But it’s up to each individual bank to decide whether they offer them.

Under the current rules, if you have put in the full £15,240 and take some out, you can’t put it back in.

Virgin Money, Coventry BS and Halifax will offer the option on their easy-access cash Isas, but not their fixed-rate deals.

With Lloyds, TSB and Barclays, you will have flexibility on easyaccess and fixed-rate cash Isas. But if you take money out of a fixed-rate deal, you can face a hefty penalty.

HSBC is looking to launch one this year, while Nationwide hopes to confirm its deal in a few weeks. Yorkshire BS savers will have to wait until the summer.

So should you join the banks and ditch cash Isas for good? Experts say it could be a terrible mistake.

If you rely on non-Isa accounts, you could find your interest becomes taxable if interest rates rise.

At 3.3 pc, for instance, you would be able to save only £30,000 before busting the £1,000 interest-free allowance. And you can’t carry your annual cash Isa allowance from one year to the next — if you fail to save the full £15,240, you can’t add it to next year’s allowance.

But by using as much of it as you can, you can ensure your savings aren’t taxed no matter how big your pot grows.

Danny Cox, of independent financial adviser Hargreaves Lansdown, says: ‘With changes to pension tax relief pending, sheltering savings and investments in an Isa has never been more important: it should still be the bedrock of every savings plan.’ Brian Morris, of the Buil di ng Societi e s Association, says: ‘The Isa remains a great product for savers, particularly with the new help-tobuy Isa and the flexible Isa.’

A British Bankers’ Association spokesman says: ‘Banks have made it easier for Isa savers with electronic transfers, streamlined accounts and better interest rate disclosure.’