‘Is it still worth saving money in a cash ISA?’
Latest figures from HM Revenue & Customs (HMRC) reveal nearly 8.5 million cash ISA accounts were opened in the 2016/17 tax year, down from the 10.1 million opened in 2015/16.
But a starker figure can be seen in the amount subscribed to cash ISAs, which fell a third from £58.7bn in 2015/16 to £39.2bn in the last tax year – nearly £20bn less.
For Tom Adams, head of research at independent savings advice site, Savings Champion, one of the biggest impacts on the cash ISA market has been the introduction of the Personal Savings Allowance (PSA) on 6 April 2016.
“For many savers, paying tax on their savings is now a thing of the past – which after all is one of the key benefits of the cash ISA,” he says.
The PSA allows basic rate taxpayers to earn up to £1,000 in interest before paying tax, while for higher rate taxpayers (earning over £45,000), they can earn £500 in interest.
Adams says: “Cash ISAs do not count towards this, so they can be held in addition. This could prove extremely valuable if you are likely to go above the threshold or if indeed you are an additional rate taxpayer, who gets no PSA at all.”
He adds that the traditional ISA season around the start of each financial year where providers flood the market with enticing rates and attractive offers in a bid to get us to use up our remaining ISA allowance before the 5 April deadline has become a “non-event in recent years”. Others have termed the recent ISA seasons as a ‘damp squib’.
Lower rates on offer
Further, the gap between the best rates on offer versus standard accounts has widened, and this has been the case for some time now.
“Simply put, you can get a higher return by sticking to standard accounts,” Adams says.
As an example, the top paying one-year fixed savings bond from Atom Bank (minimum £50 deposit) offers 1.95% AER.
Secure Trust Bank’s 120 day notice account (minimum £1,000) pays 1.56% AER while the RCI freedom savings account (minimum £100) pays 1.30%. However, savers should note that French RCI Bank does not come under the UK Financial Services Compensation Scheme (FSCS) if things were to go wrong. See YourMoney.com’s ‘Should I entrust foreign savings accounts with my money?’ for more information.
In comparison, the best easy access cash ISA offered from Shawbrook Bank pays 1.10% AER. It allows transfers in but the minimum amount is £1,000.
Savings Champion data reveals the best 120 day notice account offered from Hinckley & Rugby Building Society pays 1.20% AER (£500 minimum deposit) while the AA’s online fixed rate ISA offers 1.36% (minimum £500).
Reasons not to dismiss cash ISAs
Despite the lesser rates on offer and their dwindling popularity, there are a number of reasons to consider cash ISAs.
“While rates are low generally, the amount you can save before breaching the relevant PSA level is substantial. However, if and when rates finally go up to a higher level, it will take much less money in savings to get there. In contrast, cash ISAs will remain tax-free regardless of the interest rate applicable and the amount held,” Adams says.
Another reason to still consider a cash ISA is that if you don’t use your ISA allowance, it will be gone forever, reducing the amount you can save tax-free in the future.
Adams suggests it’s also more likely the government would change terms of the PSA than employ a retrospective change on cash ISAs already held, so users would continue to benefit from tax-free cash ISAs.
He concludes: “With a clear gap between the best rates on offer, there is a real danger of cash ISAs dropping further in popularity or even dying out. However, to dismiss them out of hand may not be the best course of action. The cash ISA still has its advantages and if you don’t use your allowance, you will lose it forever, hampering the amount you can save tax free in the future and reducing the size of your potential tax-free savings pot”.
See YourMoney.com’s Five reasons why cash ISAs are still relevant for savers for more information.