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ISAs still have some fight left in them

ISAs still have some fight left in them

Category: ISAs

Updated: 22/08/2016
First Published: 22/08/2016

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 It is now over 6 months old so the content may be out of date.

Savers are likely to have lost all enthusiasm in getting a decent return on their cash of late, thanks to a lack of competition in the market which has fuelled continued rate cuts in recent years. Rates are now at the lowest levels ever recorded, but in these times of despair, it's more important than ever to make the right choice when it comes to your savings account – so why invest in poor easy access accounts when you could have a cash ISA instead?

Holding their own

There's no getting away from the fact that savings rates have been plummeting across the board recently, but ISAs are still holding their own. Indeed, savers could be missing out on extra interest by neglecting easy access cash ISAs, as the table below highlights:

Average Easy Access Account 0.66% 0.50%
Average Easy Access ISA 1.11% 0.87%
Best Easy Access Account RCI Bank UK - 1.65% RCI Bank UK 1.20%
Best Easy Access ISA Virgin Money - 1.51% Melton Mowbray BS - 1.25%
Source: Compiled 22/08/2016

Despite rates in both sectors having fallen dramatically in the last year, it still makes a lot of sense to opt for a cash ISA instead of a non-ISA equivalent. But just why aren't people getting on board? The Financial Conduct Authority estimates that the balances held in easy access ISAs are less than a third of that held in equivalent non-ISA accounts. As the table shows, this could mean that many savers are missing out.

The PSA impact

Analysis suggests that much of it could be due to the Personal Savings Allowance, which allows basic rate taxpayers to earn up to £1,000 in interest tax-free, regardless of where the money is held. This could mean that savers now wonder whether there's any point in investing in an ISA when they earn tax-free interest from other accounts, but as Moneyfacts' finance expert Rachel Springall explains, there's still cause for one.

"Some may assume that the Personal Savings Allowance (PSA) makes an ISA redundant, but this is just not the case," she said. "There is no guarantee the PSA will last forever, and those consumers prioritising their emergency cash savings by using an easy access account will in fact find that some ISAs pay a better rate. Most of the providers doing so are mutuals, who clearly want to support their customers in uncertain times."

ISAs aren't dead!

All in all, there's still life in the ISA market yet. It's true that savers have been left devastated by persistent rate cuts across the market, with 285 rate cuts so far this month and 20 best buy deals withdrawn from the market completely. The recent base rate cut will only have given providers another excuse to slash rates – which is why ISAs shouldn't be overlooked.

The fact that the average easy access ISA pays 0.87% compared with the 0.50% of its non-ISA counterpart is reason enough to consider such a deal, and with this kind of account, you needn't worry about your money being locked away during these uncertain times.

There's also an abundance of easy access ISAs paying over 0.25% to offer a base rate beating deal: only five deals pay 0.25% or less, compared with a disappointing 55 of non-ISA counterparts.

"Clearly, the notion that ISAs are dead in the water is just a myth," concluded Rachel. "These tax-efficient vehicles are designed to benefit savers over the longer term and provide flexibility. The only downside to ISAs are the longer-term fixed rates, which pay slightly under their taxable counterparts, so choosing the right deal will completely come down to an individual's tax allowances."

What next?

Compare the top cash ISAs to find the best home for your money

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.