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Choice for ISA savers increases but rates still disappoint

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15/05/2017
With rates at all-time lows, there hasn’t been much for savers to cheer about recently. But new analysis provides a glimmer of relief: savers now have more choice.

According to data firm Moneyfacts, the number of ISA products on the market has reached a four-year high.

There are currently 366 cash ISAs available compared with 324 in May 2016, a 13% increase.

With little difference between this year and last year’s savings environment, it’s not clear what has driven this boost, but Charlotte Nelson, finance expert at Moneyfacts, said it’s likely down to demand.

“The fact that £80bn was subscribed to ISA accounts in the 2015-16 tax year perhaps means providers are now seeing the benefit of offering a product in this area,” she said.

But unfortunately, more competition hasn’t led to a better outcome for savers.

Rates on ISAs are still disappointing, with the best one-year fixed rate ISA from Bank of Cyprus UK paying a measly 1.13%.

Savers would in fact be better off opting for a non-ISA account. They can get 1.55% on a standard, one-year fixed bond from Charter Savings Bank.

But aren’t ISAs the tax-free option?

In previous years, ISAs were the preferred choice because anything earnt was free from tax.

But the landscape changed last April with the introduction of the Personal Savings Allowance (PSA).

This means basic rate taxpayers can earn £1,000 of interest before they have to pay any tax. For higher rate taxpayers, the PSA is £500.

So, ISAs are a waste of time?

With rates on savings accounts at rock bottom, it’s pretty difficult to earn more than £1,000 (or £500) in interest meaning some people think ISAs are pointless.

However, rates will eventually go up and it’s important to remember money in a cash ISA is protected from tax indefinitely. You could also become a higher rate taxpayer, which would cut your PSA to £500, or even an additional rate taxpayer, which means you’re not eligible for a PSA.

So it may be a bit too premature to ring the death knell for the ISA.

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