At one time, the start of a new year would have heralded the beginnings of ISA season, as providers sought to attract those yet to save in the current tax year as well as those who would be looking for a new account in April. Unfortunately, our figures show that this is no longer the case, as not only have product numbers fallen, but average rates have dropped significantly in the last month.
The figures highlight the true extent of the issue, with the most significant reduction being in the fixed sector of the market: the long-term fixed ISA rate fell by 0.07% to 1.88%, while the one-year ISA rate fell by 0.05% to stand at 1.40%, the lowest rate ever recorded in this sector.
It's a similar story in the variable ISA sector, as although the no notice ISA rate posted a less significant drop of 0.02% (to 1.07%) and the average notice rate remained unchanged at 1.20%, both remain the lowest ever seen.
Rates have been on a general downwards trend for much of the last year, a particularly unusual feature in the ISA sector – typically, we would expect there to be minimal activity when not in ISA season with rates stabilising as a result, so the fact that rates have been almost consistently falling suggests a clear shift in focus.
Far from ramping up for a season of intense competition, it seems that the opposite is happening, with providers showing absolutely no desire to attract savers' money – and rates, not to mention savers' returns, are suffering as a result. But why?
Analysis suggests that much of the lacklustre response is due to upcoming changes to savings tax rules: from April this year, a personal savings allowance will be implemented whereby the first £1,000 earned in interest each year will be tax-free (the first £500 for higher rate taxpayers).
This means that savings balances will need to be significant before any interest is taxed, particularly given the current low-rate environment, and as a result, there's widespread uncertainty about the impact this change will have on the ISA sector.
George Osborne said that the change will bring 95% of savers out of savings tax altogether, and this could have understandably led to apprehension on the part of providers. Evidence suggests that many are now wondering whether there's any point in competing at ISA level at all, which could be fuelling the drop in competition.
There's a chance that things could turn around for the sector in the future – higher rate taxpayers, for example, will still benefit from the tax-efficiency that ISAs can offer, and there's no indication of how long the new rules will last, either – but for the time being, the lack of desire to compete is overwhelmingly clear.
This is why it's more important than ever to compare the available options and get the best possible rate for your savings pot. Average ISA rates may be falling, but there are still some great individual deals around – all you have to do is look! Start the process by checking out our ISA best buys and see if you can beat the rate drop.
Compare cash ISAs
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.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.