If you thought that average savings rates couldn't get much lower, it seems that you were – unfortunately – mistaken, as our latest figures show that the average easy access ISA rate has fallen to the lowest on record.
Activity in the ISA market has been dismal for some time, but it's recently taken an even more unfortunate downturn. Our figures show that the average easy access ISA rate now stands at a paltry 1.11%, down from 1.18% at this time last year, which means that it's hit yet another fresh low.
However, it hasn't always been this way, and looking further back reveals how disappointing the sector has become: when we first started recording this measure in 2007, the average easy access ISA rate stood at 5.48%, a level that's been unheard of for years.
Much of the downturn is the direct result of the Government's Funding for Lending Scheme, which was launched in summer 2012, and if you look at the table below, you'll see just how much of an impact it had – and it's gone from bad to worse ever since.
Average Easy Access ISA Rate
What's even more disappointing is the fact that other sectors of the savings market have been showing signs of improvement recently, with average fixed rates having risen for the last few months and the notice sector enjoying a healthy amount of competition, too. Much of this could be down to the rise of challenger banks – and the fact that they're not yet making themselves known in the ISA sector.
"Considering the savings market has recently seen a return to positivity, it's hugely disappointing to find that ISA rates are still falling, with the average easy access ISA plummeting to its lowest rate on Moneyfacts' records," said Charlotte Nelson, finance expert at Moneyfacts.
"The savings market has been boosted by challenger banks, which have been competing heavily on price. However, these new kids on the block have yet to make their mark on the ISA market, and this lack of competition is leading to stagnation.
"ISA savers who have done all they can to get the best rate and shelter their returns from the taxman are wondering when they are likely to get a reprieve, but it seems that providers are reluctant to boost rates in this key market."
Unfortunately, it doesn't look as though the general pattern will change any time soon, even if challenger banks start to compete in the sector – and it's all down to the forthcoming changes to savings tax.
One of the standout policy changes in this year's Budget was the announcement of the personal savings allowance. From April next year, the first £1,000 in savings income will be exempt from tax (the first £500 for higher rate taxpayers), a move that's expected to bring 95% of taxpayers out of savings tax altogether.
This means that ISAs could effectively become obsolete, and another key ISA change – namely the fact that investors can now withdraw ISA savings and put it back in at a later date without losing their tax-free entitlement – is unlikely to change savers' feelings to any extent.
"With new tax rules for savings coming into play in 2016, which will make all interest earned up to £1,000 tax-free, ISAs have the potential to lose their main selling-point," said Charlotte. "This then begs the question, what will happen to the ISA market if this lack of competition continues?" It's a question that many savers will be asking themselves.
So, is investing in an ISA really worth it? For the time being, yes – even though rates are falling, the fact that ISAs are still currently the only way to earn tax-free interest means the gains could still outweigh the returns offered from traditional savings accounts, and there are still some decent deals out there. Check out our ISA best buys to find an easy access deal that pays more than the 1.11% average – there are plenty to choose from – and maximise your tax efficiency before the new rules come into play.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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