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Could this be the worst ISA season on record?

Could this be the worst ISA season on record?

Category: ISAs

Updated: 15/03/2016
First Published: 08/03/2016

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 It is now over 6 months old so the content may be out of date.

Traditionally, this is the time of year when ISA providers boost their offerings to encourage savers to invest their ISA allowance before the start of the new tax year. However, this tradition appears to have come to an end – rather than raising rates, providers have been actively cutting them, with savers now facing some of the worst cash ISA deals on record.

Our figures highlight the extent of the issue, and as the table below shows, it isn't looking good for ISA savers:

Five years ago Two years ago One year ago Six months ago Today
Top Easy Access ISA Rate 3.15% 1.75% 1.50% 1.51% 1.41%
Top Two-Year Fixed ISA Rate 3.50% 2.10% 2.10% 2.05% 2.00%
Top Five-Year Fixed ISA Rate 4.30% 3.00% 2.75% 2.68% 2.60%
Compiled: 8.3.16

Essentially, it looks as though this ISA season could be the worst we've ever seen, with even the best rates on the market offering paltry returns – and the ever-popular easy access deal has borne the brunt of it, with a reduction of 0.10% in just six months.

"ISAs were once the go-to product for savers as they offered not only tax benefits but also some of the better rates," said Charlotte Nelson, finance expert at Moneyfacts. "However, this is certainly no longer the case thanks to almost constant rate decreases.

"This is a devastating by-product of schemes such as the Funding for Lending initiative – providers simply don't need savers' money at the moment, and as a result, rates have fallen, with top deals being available for only a short period of time before slowly slipping down the Best Buy tables. This is extremely disappointing and undoubtedly leaves many savers wondering if an ISA is even worth the trouble."

However, there's another factor that could be taking its toll on ISA rates – the personal savings allowance (PSA). The PSA, which is due to come into place next month, seems to have only exacerbated the downward slide in ISA rates: from April, £1,000 of interest earned will be tax-free, which means that the importance of getting an ISA each tax year has reduced considerably.

But this doesn't mean you should put all your eggs in one basket, so to speak. Charlotte explains: "Relying on the PSA alone for your tax-free pot is a gamble – eventually rates will go up, and the amount savers can save tax-free will subsequently diminish.

"For this reason ISAs shouldn't be overlooked, particularly if you have larger amounts to save. In addition, ISAs can be passed on to spouses after death, which is worth contemplating when weighing up your long-term interests." There's also the fact that there's no guarantee of how long the PSA will last for – if the allowance is withdrawn in future years, your savings interest will be taxable again, whereas any money you build up in an ISA will remain tax-free for life.

For these reasons, an ISA is still worth considering, even if rates aren't exactly appealing at the moment. But you'll need to be quick – if we do have an ISA season this year it's likely to be short-lived, so savers seeking a deal will need to act fast to secure their chosen account before it becomes oversubscribed and has its rate reduced, and you wouldn't want to miss out!

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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.