What savers can expect from this year’s ISA season
We are about to enter ISA season, traditionally the time of year providers flood the market with enticing rates and attractive offers in a bid to get us to use up our remaining ISA allowance before it runs out on 5 April.
But as has been the case for several years now, the 2017 ISA season is set to be a damp squib.
If you’re one of the millions of embattled savers waiting with baited breath for higher ISA rates over the next couple of months, expect to be disappointed.
Savings rates – including ISA rates – have been on a steady decline and the Bank of England’s decision to cut the Base Rate last August, following the Brexit vote, gave providers the green light to cut rates even further.
The average ISA is currently paying a measly 0.83% compared to 1.42% a year ago, according to data firm Moneyfacts.
‘Banks and building societies don’t need savers’ cash’
Rates are low because banks and building societies do not need savers’ cash.
Providers stopped competing to reach the top of the best buy tables when the government’s Funding for Lending Scheme launched in July 2012.
The scheme provided banks with access to cheap funding, which in turn meant they didn’t need to battle it out for savers’ deposits. This really put the kibosh on savings rates (see chart below).
Last August, to make sure the Base Rate cut was passed onto households and companies, the Bank of England announced a new lending scheme called the Term Funding Scheme, which will see the BoE lend £100bn to banks at a generous rate.
“This means the need for providers to raise money from savers continues to be virtually non-existent,” says Anna Bowes, director at savings advice site Savings Champion.
But paltry rates alone are not the only reason this ISA season is expected to be a dismal affair.
The introduction of the Personal Savings Allowance (PSA) last April has led many savers to question whether they should bother with a cash ISA at all.
The PSA allows basic rate taxpayers to earn up to £1,000 of interest in banks and building societies tax free (£500 for higher rate taxpayers).
Andrew Hagger of research firm Moneycomms says the PSA has made the cash ISA “almost redundant for many small savers”.
“Even if you are lucky enough to have a savings pot of £66,000 at 1.5% interest you will earn less than the £1,000 PSA limit for a basic rate taxpayer,” he says.
Lifetime ISA rate war
One area where a rate war may materialise is in the Lifetime ISA space. The new tax-free savings account is launching in April and is aimed at helping people save for their first home and their retirement simultaneously.
Savers under the age of 40 can open a Lifetime ISA, contribute up to £4,000 each tax year and the government will provide a 25% bonus. Savers can make contributions and receive a bonus from the age of 18 up to the age of 50. If they save the maximum every year, they could pocket £32,000 from the government.
Danny Cox, head of advice at Hargreaves Lansdown, expects to see a number of competitive rates unveiled towards the end of the tax year and ahead of the product’s launch date on 6 April.
“Some providers will want to use the Lifetime ISA as a way of drawing in customers and potentially getting them to take out a mortgage,” he said.
Higher rate taxpayers
One group of people who still stand to benefit from ISAs are higher rate taxpayers, who have a lower PSA limit of £500, with larger sums to save.
“For them an ISA is still a way of shielding extra monies from the taxman,” says Hagger.
“The plus point is that the money is ring-fenced for as long as you keep the ISA product and you can ring-fence another lump sum each year in line with your annual ISA allowance.”
Tips for cash ISA savers
Savers looking to use up their 2016/17 allowance of £15,240 are urged to shop around for the best rates.
“It’s so easy to go directly to your bank for an ISA, but it is highly likely that the rate will be poor in comparison to other deals that reside in the best buy [tables],” says Charlotte Nelson of Moneyfacts.
“Savers looking for easy access to their cash will find a top rate of 1.00% offered by National Savings and Investments, whereas an easy access ISA from Natwest pays a poor 0.01%.”
Nelson says savers should also act fast as the best deals become oversubscribed very quickly.
Another piece of advice is not to withdraw cash from an ISA to reinvest.
“When the money is outside of an ISA it is then taxable,” says Nelson. “Savers must always make sure to make an ISA transfer when moving cash around.”
Also, remember some providers such as the Post Office will let savers split their allowance across an easy ISA and fixed ISA, which is good for those who want a higher return from a fixed rate but who also want quick access to a portion of their cash from an easy access pot.