The bitter Siberian winds aren’t the only unseasonal thing about the UK at the moment. The banks are also refusing to get into the Spring spirit. The last few weeks of the tax year – the so-called “ISA season” – have traditionally seen household names falling over themselves to attract new customers with eye-catching rates. This year, however, has been a huge disappointment for savers. A brief glance at the best-buy tables for Cash ISAs tells you all you need to know. Even by locking your money away with Halifax for five years at 3.1 per cent, you’d fail to beat the RPI annual inflation rate of 3.3 per cent.
If you want easier access to your money, the news is even more depressing. The top-rate easy access account is just 2.5 per cent – and that includes a bonus of 2 per cent, which will melt away after a year. According to Moneyfacts, the average ISA pays just 1.79 per cent, a significant fall over the last five years.
So what’s going on? The brutal truth appears to be that the banks just aren’t that into you. Thanks to the Government’s £80 billion Funding for Lending Scheme, they are able to borrow cheaply without tapping savers for funds.
Admittedly, this hasn’t stopped them advertising. There have been some eye-catching initiatives this year, such as Santander offering a 0.1 per cent bonus if Rory McIlroy wins a golf major and Halifax entering you into a £250,000 prize draw if you fund your ISA with more than £5,000. And yet when you look beyond the glossy marketing, the rates remain disappointingly low.
Despite this, cash ISAs remain a popular low-risk way of saving
Even though the banks are playing hard to get, it doesn’t seem to have dampened savers’ enthusiasm for Cash ISAs. According to uSwitch.com, the comparison service, savers plan to put an average of £3,723 into Cash ISAs this year, up from £2,784 last year. Some 77 per cent of Britons are willing to make sacrifices to fill up their full allowance.
Whether this enthusiasm is misplaced is more debatable. Cash gives you a wonderful sense of security, with deposits protected up to £85,000 per institution under the Financial Services Compensation Scheme. Yet it is probable that cash savers will lose money in real terms over the medium-term. If, as many predict, interest rates remain at record-low levels for the next few years – and inflation continues to hover at 3 per cent – cash savers could be losing around 1.5 per cent per year.
What are the alternatives?
ISA savers aren’t limited to Cash ISAs. They can also pay into Stocks and Shares ISAs. In 2011/2012, of the £53.9 billion invested in ISAs, 70 per cent was invested in Cash ISAs and only 30 per cent in Stocks and Shares ISAs. It remains to be seen whether the combination of rising equity markets and low rates for Cash ISAs will make frustrated savers less risk-averse this year.
Four useful facts about ISAs
1) Every year the government gives you a tax-free allowance in the form of an Individual Savings Account – commonly known as an ISA. There are two main sorts of ISA – a Cash ISA and a Stocks and Shares ISA. A Cash ISA normally has an interest rate based on the Bank of England’s base rate. A Stocks and Shares ISA, on the other hand, can go up and down in value, depending on the underlying value of the assets it holds.
2) This year’s allowance is £11,280. In the current tax year, which runs from 6th April 2012 to 5th April 2013, you can put up to £11,280 in your ISA. You can put all of that into a Stocks and Shares ISA. Or you can put up to £5,640 in a Cash ISA, putting the rest into a Stocks and Shares ISA.
3) A “Stocks and Shares ISA” can, in fact, be invested in anything from equities to corporate bonds, gilts to gold, unit trusts to wheat futures.
4) An ISA may not be the most tax efficient approach for everyone, and tax legislation could change in the future. Everyone’s personal tax situation is unique. If you are unsure if an investment is right for you, please seek independent financial advice.