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Is the cash ISA dead?

Paloma Kubiak
Written By:
Paloma Kubiak

Cash ISA rates continue to decline and with the Personal Savings Allowance set to come into force this April, many are now questioning whether they’re still worth saving in.

Typically in the month or two leading up to the end of the tax year on 5 April, ISA season kicks in. This is when providers tend to launch their headline-grabbing deals. However, last year was one of the worst for rates since ISAs launched back in 1999.

And as we move closer to the launch of the Personal Savings Allowance (PSA) in April 2016, which will mean basic rate taxpayers can earn £1,000 and higher rate earners £500 of interest on savings tax free, the appeal of cash ISAs is floundering.

Fixed rate cash ISAs took a dip back in July 2015 and rates are yet to recover. Where once the fixed rate ISA paid an average of 0.44% more than fixed rate bonds, today they pay 0.13% less.

The table below shows how fixed rate bond rates compared to fixed rate ISAs:

YMoney FixedRateBondsTable

Currently, savers in the best easy access account, paying 1.55% (with RCI) will breach the PSA with more than £64,516 for a basic rate taxpayer, or £32,258 for a higher rate tax payer.

However, the current best easy access cash ISA rate is lower at 1.45%, but savers could have amassed £86,280 in cash ISAs and that excludes interest earned. With average interest included, this could be closer to £100,000, fully tax-free.

Savers will lose interest

Susan Hannums, director at Savingschampion.co.uk, said that if rates don’t improve savers won’t see the point in utilising their cash ISA allowance, even if it’s in addition to their Personal Savings Allowance.

She added: “If providers are already losing interest in cash ISA savers, savers will shortly follow.

“Although in the short term, while rates are low, opting to use the PSA before using your Cash ISA may be the better option, but if and when rates do eventually start to rise, the amount at which savers can save tax free will diminish, if they are only utilising the PSA”.