LEE BOYCE: Top cash Isa rates are falling fast, what next for tax-free rates?

In recent months, whenever I go to refresh the This is Money five best cash Isas guide while working from home, I put my head in my hands.

Rates haven’t just fallen off a cliff – they’ve somersaulted into the Mariana Trench, and are sinking so fast, it’s hard to see them bobbing back anytime soon.

It’s too late to give the piggy bank a life jacket and some flippers.

Sinking feeling: Savings rates are continuously diving to a point where some banks aren’t really offering them at all

Now, in the topsy-turvy world of tax-free savings, if you want to beat the best easy-access deal on offer from National Savings and Investments, you’ll have to lock away your money for a mammoth five years. 

Just to rewind, five years ago, we’d just had a general election with an EU referendum yet to be confirmed, Leicester City were about to embark on a wild and unexpected Premier League title and David Bowie was still a living legend.

In other words, it feels like an incredibly long time to lock away money. 

The top one and two-year fixes, a popular choice for many to earn a little more interest, now pay less than that NS&I instant-access account.

The Government-backed operator is offering the top deals and ultimately, if and when they vanish, rates will collapse to a point where it could be a long time before we see 1 per cent or more on offer.

This is a rate so uninspiring, many will simply shrug and say: what’s the point of earning a tenner on £1,000? Although encouragingly for some, lockdown has kick-started the savings habit despite the low rates.

Recently, NS&I upped its financing target by nearly 500 per cent to £35billion in a move that has helped prevent a complete collapse of rates.

But how long it remains a best buy destination remains to be seen. Billions has been pouring into it since the start of the coronavirus pandemic.

Big banks have been a terrible place to hold savings for a few years – we’ve seen that recently with all of them now offering just 0.01 per cent on easy-access accounts.  

The market has been propped up by challengers and smaller building societies.

However, that has been largely in traditional savings accounts rather than Isas. A big part of this is that the latter require more red tape for providers to run and as such, have offered slightly lower rates, with fewer providers.

We’re now in new, unusual territory. The top rate for fixing for a year is 0.76 per cent. 

For two years, it is 0.85 per cent, both with relatively unknown Charter Savings Bank. 

Even the top three-year deal only pays 0.85 per cent.

This compares to 0.9 per cent easy-access offered by NS&I and its direct Isa. And even that comes with a huge asterisk – it doesn’t accept transfers in.

You can get 0.9 per cent from Cynergy Bank, which continues to be the only real competitor to NS&I. This does accept transfers in and it is likely to be sweeping up those who require a pot shift. 

If you want to beat this, you’ll have to fix until summer 2025 – all for an extra 0.2 percentage points with Shawbrook Bank. You can get 1.25 per cent, or 0.35 percentage points more, but that requires fixing for SEVEN years with the same bank. 

There is ever-dwindling choice for savers and this could be exacerbated further once NS&I drops its rate or pulls its Isa entirely.

The savings market has been hit by the coronavirus crisis which saw a cut to 0.1 per cent for the base rate, alongside the launch of a new funding scheme to pump cheap money to banks, and expansion of quantitative easing.

It may leave many scratching their head as to where to put their cash next – although, it seems at the moment, the answer for most has been NS&I, with record amounts of money pouring in.

Bounce back: Until 2018/19, the amount held in Isas has been dwindling for a number of years, mainly thanks to the new Personal Savings Allowance

Bounce back: Until 2018/19, the amount held in Isas has been dwindling for a number of years, mainly thanks to the new Personal Savings Allowance

Cash Isas vs stocks and shares 

These rates have crreated an incentive for people to choose stocks and shares Isas over cash for the long-term (personally, depending on your circumstances, I think a mix of both is good), but recent HMRC data shows that appetite has waned.

Around 11.2million adults subscribed to an Isa in the 2018/19 tax year, up from 10.1million the year before.

But the number subscribing to stocks and shares Isas fell by nearly half a million in the same period and it means the amount in cash swelled to 76 per cent of all Isa accounts, up from 70 per cent from the year before.

Although, 54 per cent of all money held in Isas is in a stocks and shares variety, compared to 46 per cent in cash, suggesting investors are far more likely to have built up bigger pots.  

Around £67.5billion was put into adult Isas in 2018/19, marking an increase of £2.3billion compared to the year before. This rise was driven by the upturn in cash, which increased £7.3billion.

Meanwhile, the amount of money stashed away into stocks and shares Isas fell £5.2billion in the same timeframe.

So, despite the low rates, cash Isas are proving popular once more – who needs an Isa season? Big banks, offering low rates, realise many are simply now not chasing rates, but looking for a safe port in a storm.

It is worth pointing out that the 2018/19 financial year did see a 4 per cent fall in adult Isa holdings.

However, there is still £584billion in them and the drop was down lower value of funds held in investing Isas. 

For every adult in Britain, there is an Isa with a five-figure sum in it, a remarkable stat.

The cash Isa has been a popular choice for savers for the last two decades, with limits that have risen far faster than inflation – you can tuck away £20,000 away from the taxman this financial year, compared to £3,000 in 1999 when Isas began.

What’s the point of an Isa?

Tax changes in 2016 mean that for most savers, cash Isas may appear to be fairly pointless compared to normal savings accounts, especially as they often offer slightly lower rates.

But for many, this tax-free wrapper is a crucial part of their portfolio.

Despite the tax-free savings interest allowance of £1,000 a year for basic rate taxpayers and £500 for higher rate taxpayers in non tax-free accounts now, an Isa can still be worthwhile savings option, especially long-term.

Money sheltered in an Isa will deliver a tax-free income, even above that £1,000 level and if you are building up a long-term pot, you may one day be thankful for that.

Barclays revealed this week that £20.2bn of savings has poured into it in the first six months of the year. Santander saw deposits increase £7.9bn. Barclays easy-access Isa offers 0.1% and Santander 0.05%.

And who knows if the personal savings allowance will be around forever – it is much more likely to disappear than the Isa wrapper, especially given the fact the Government will be looking for ways to claw back savings itself thanks to the coronavirus crisis.

Many will simply opt for ease, and continue to hold a cash Isa where they have their current account, and suck up the low rates, with the thought of form filling, and moving money simply too cumbersome for a little bit of extra interest.

For that reason, banks are not likely to need to entice savers in anytime soon. They don’t owe savers anything, they play to market conditions. 

Case in point: Barclays revealed in results this week that £20.2billion of savings has poured into the bank in the first six months of the year, increasing its deposits by 10 per cent.

Santander saw deposits increase £7.9billion in the same timeframe. Barclays easy-access Isa offers 0.1 per cent and Santander 0.05 per cent. 

For some time yet, I don’t think there will be a rate chasing market for savers – but simply one where they look for easy access, ease of use and safety until hopefully something better blows along.

Will that be before 2025? I wouldn’t raid my piggy bank to bet on it. 

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