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Has the ISA market lost its shine?

Has the ISA market lost its shine?

Category: ISAs

Updated: 21/06/2016
First Published: 21/06/2016

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 It is now over 6 months old so the content may be out of date.

The ISA market has been on a downward spiral for some time now, a fact that has been brought into stark relief by the failed appearance of this year's ISA season. Unfortunately, our latest figures confirm this trajectory – although the majority of average savings rates fell this month, it's the ISA sector that bore the brunt of the reductions, with activity in the sector becoming almost non-existent.

Falling rates…

The figures, from the latest Moneyfacts UK Savings Trends report, shows that the average notice cash ISA rate fell by 0.01% this month to stand at 1.13%, while the no notice equivalent saw an even greater fall of 0.05% to hit 0.98%. Significantly, this marks the first time that the rate has fallen below 1.00%, which highlights the extent of the poor performance of this sector of the market.

Fixed ISA rates didn't fare any better, with the average one-year ISA rate falling by 0.04% to 1.22%, while the long-term equivalent fell by an even more notable 0.06% to stand at 1.46% – the first time it's fallen below 1.50% – which means that all sectors of the ISA market have hit fresh lows.

These kinds of cuts are now becoming a monthly occurrence, and they're having a significant impact on the sector, with the gloss of these once-loved accounts definitely receding.

The market is declining rapidly, too, a fact that can be further highlighted when looking on a longer-term basis: rates have fallen particularly dramatically over the last six months, with the average no notice ISA rate falling by 0.11% since December 2015, while the notice ISA rate is down by 0.07%, the one-year ISA rate by 0.23% and the long-term rate by an even more significant 0.49%.

This is despite the fact that we've just been through what should have been ISA season, but the complete lack of activity and absence of competition between providers meant that rates actually fell further during these key months.

… and low demand

As a result, fewer of us are looking for these kinds of accounts, and although the personal savings allowance could have something to do with it, the continued rate cuts from providers will have certainly exacerbated things.

Indeed, up until now, ongoing consumer demand had been the only saving grace for the sector, but now even this level of activity is declining rapidly: our figures show that search activity for fixed rate ISAs fell by 5.47% this month, while demand in the variable ISA sector fell by 5.05%, reversing the recent period of gains.

It could be argued that this is a traditional occurrence for the time of year, with demand for ISAs typically falling once savers' ISA provision for the new tax year has been arranged. However, this year has seen demand fall particularly rapidly, so it appears that consumers are turning away from the market faster than usual.

This in itself could be a self-fulfilling prophecy: analysis earlier in the year surmised that uncertainty over the personal savings allowance was prompting providers to cut their rates, but this has, in turn, caused savers to retreat from the market. When you consider that it's now becoming easier to secure a comparable rate in the non-ISA sector, combined with the fact that interest of up to £1,000 is now tax-free for basic rate taxpayers no matter where it's kept, consumers may be weighing up the benefits of continuing to invest in ISAs – and so the cycle of rate cuts and falling demand could continue.

What does the future hold?

All in all, it isn't looking good for the former darlings of the savings market. Uncertainty over the personal savings allowance hasn't been the only thing to impact rates, either, and when you add the other factors into the equation – such as the fact that providers simply have more scope to reduce ISA rates as they were higher to begin with, not to mention the current level of economic uncertainty, continued low inflation, historically low base rate and the general lack of need to raise funds – there's little reason to expect things to change in the near term.

ISA rates have the potential to fall further in the months ahead, and it'll only be in the latter half of the year – when a measure of certainty will hopefully return to the sector – that we may begin to see some change. In the meantime, there's little to get excited about, but it doesn't mean you should get complacent. If anything, it makes it even more important to compare ISA rates and make sure you're getting the best you can for your money.

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