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No sign of ISA season as rates plummet

No sign of ISA season as rates plummet

Category: ISAs

Updated: 20/04/2016
First Published: 20/04/2016

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 It is now over 6 months old so the content may be out of date.

We're supposedly in the grips of ISA season, but you wouldn't think so if you looked at the wares on offer. Average savings rates may have been falling in recent months but there's typically a change of focus at this time of year as competition ramps up, but unfortunately, our figures show that this hasn't so far been the case, and instead the opposite has occurred – resulting in ISA rates falling to fresh lows.

Dramatic reductions

The figures reveal that average ISA rates have fallen across the market, with the most significant reductions being seen in the fixed sector: the average one-year fixed ISA rate fell by 0.03% this month to stand at 1.31%, while its long-term counterpart fell by an even more notable 0.09% to 1.60%.

The variable sector hasn't escaped cuts, either, with the average no notice cash ISA rate falling by 0.01% to 1.05%, while the equivalent notice rate dropped by 0.02% to 1.16%. This means that all cash ISA rates are now the lowest ever recorded, a particularly surprising outcome given the time of year.

Indeed, in recent years both rates and product availability have risen in the months leading up to the new tax year, as providers compete to attract savers both at the end of one tax year and the beginning of the next. However, this year, there hasn't been the same kind of boost in activity, as not only have average rates fallen, but availability has dropped considerably.

Competition lacking

The figures went on to show that there are currently 301 cash ISAs available, a reduction of 16 from March and the fifth consecutive monthly drop, which also makes it the lowest level of ISA availability seen in over a year.

So just what's caused this level of provider apathy? Well, while the general reasons remain – specifically, low base rate and the simple lack of need for the majority of providers to raise funds through savings balances – the fact that even ISA season hasn't prompted a rise in activity suggests that other factors must now be at work, and arguably, the key factor is the personal savings allowance (PSA).

The PSA, which came into force at the beginning of the new tax year, allows savers to earn up to £1,000 in interest tax-free, regardless of where they keep it. It was expected that its launch would have some form of impact on the ISA sector, with many fearing that ISAs as a whole would become obsolete as consumers migrated towards alternative forms of tax-free saving. It's this fear that could have understandably led providers to be more cautious with their ISA offerings, and therefore prompted them to reduce rates.

Unfounded fears?

However, this fear could prove to be wholly unnecessary, as consumers still appear keen to invest in ISAs. Our demand data shows that the number of searches for both variable and fixed rate ISAs rose notably in the last month, while other sectors saw a distinct drop in demand, which suggests that savers are still looking to make the most of their ISA allowance.

This is arguably the sensible decision. The £1,000 tax-free limit may seem generous, particularly in the current low-rate environment, but it won't seem quite so good when rates eventually rise. Nor will it suit those with particularly large savings pots or higher rate taxpayers, who get a lesser £500 allowance, and there's also no guarantee that the PSA will last forever.

Funds held in ISAs, however, remain tax-free for life, regardless of what happens to rates in the future or how big a pot you manage to accumulate. It's probably for these reasons that savers still want ISAs, but despite this, providers appear reluctant to accommodate: the general uncertainty over how the PSA will ultimately impact the landscape appears to be having a greater influence, regardless of how consumers are viewing the situation, and that level of uncertainty is fuelling continued rate cuts.

What can you do?

Unfortunately, the trend is clear. ISA rates are on a definite downward spiral with the typical ISA season looking set to be non-existent, and with the PSA in force and competition stalling across the market, there's no sign of things changing in the near-term. BUT, that's not to say that you have to put up with paltry rates.

It's important to remember that the figures cited are only averages, and you can actually get far higher rates if you take a proper look at the market. For example, the top long-term ISA from United Bank UK actually pays 2.20% – far higher than the average of 1.60% – while the top no notice ISA pays 1.40% (compared with the average of 1.05%) and the top notice equivalent from Al Rayan Bank offers a fantastic expected profit rate 2.02%, well above the 1.16% average.

That just goes to show the importance of shopping around, so if you're in the market for a new ISA, check out our best buys and see if you can find a better deal.

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.