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ISA rates fall further thanks to tax changes

ISA rates fall further thanks to tax changes

Category: ISAs

Updated: 18/11/2015
First Published: 18/11/2015

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Just when it seemed that the tide may be starting to turn for the savings market, our latest figures reveal a significant step back, with average ISA rates falling across the board in the last month – and much of it is attributed to the forthcoming change in savings tax rules.

A new low

Neither the fixed nor variable sector of the cash ISA market were able to escape the rate cull, with both posting notable reductions: the average notice ISA rate fell by 0.01% this month to 1.21%, while the no notice equivalent fell by 0.02% to stand at 1.09%. Not only does this mark the first drop the no notice ISA rate has seen since August, but it means that the rate has now hit a fresh low, being the lowest Moneyfacts has ever recorded.

It's a similar pattern in the fixed sector, with the one-year ISA rate down by 0.02% (to 1.46%) and the long-term ISA rate posting a 0.01% fall. It isn't quite such a significant end result as in the variable sector, as at 1.98%, this long-term rate is one of the highest rates seen in the last year, but the one-year equivalent still remains among the lowest.

External factors

But just why are rates still falling? Activity in the ISA sector traditionally remains muted at this time of year, so the fact that providers are actively cutting rates is particularly notable: the bulk of activity usually occurs during ISA season with providers making very little changes to their products outside of that, which means that rates typically remain stable during the winter months.

The fact that averages are actually falling is therefore highly unusual. Rates will rarely move at all at this time of year and we certainly wouldn't expect them to keep dropping, which suggests that something external must be having an impact on pricing activity in the sector. Arguably, this external factor is the rising level of uncertainty surrounding the upcoming savings tax changes, and what they could ultimately mean for ISAs.

What does it all mean?

First announced by Chancellor George Osborne in this year's Budget, the new rules stipulate that a personal savings allowance will come into force from April next year, whereby the first £1,000 in savings income (the first £500 for higher rate taxpayers) will be exempt from tax. This means that the vast majority may not have to pay any tax on the interest they earn from their savings, and in fact, the Government thinks that it'll bring 95% of taxpayers out of savings tax altogether!

However, while that's undoubtedly good news for savers, what does it mean for the former darling of the savings market? Well, there's the chance that, in the majority of cases, ISAs will simply lose their appeal – other savings accounts will have the same tax advantages, and ISAs will no longer have the potential to result in higher returns.

This will lead to an inevitable drop in demand on the part of savers, but this expectation, and the uncertainty around where it will leave the ISA market as a whole, means that providers are already reacting – and it's why they're lowering rates.

Don't lose out!

If you needed any further confirmation that the ISA market was suffering, you just need to look at the raft of headline-grabbing changes in recent weeks. NatWest, for example, has just halved its easy access ISA rate for many savers, following a similar move by NS&I, while HSBC and TSB have announced that they, too, will soon be slashing rates.

As you can see, competition has already dropped significantly over fears that ISAs will become obsolete, but all is not lost: there are still some good deals to be found – and remember that the personal savings allowance may not be a permanent feature, so ISAs could well come back into their own in the future – so for the time being, if you're not happy with your current ISA or the rate you could soon be getting, it's time to switch!

You can still only have one active ISA per tax year, but there's nothing to stop you from closing the account and transferring your ISA savings to another provider. As long as you make sure to follow the balance transfer process correctly – find out more here – you'll still retain your tax benefits and could soon be on your way to better returns. Check out our ISA best buys to see if you can find a better home for your money, no matter what happens to the market at large.

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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