2017 worst year for cash ISA returns

Despite today's figures showing that inflation has gone down slightly, it still sits much higher than the return that can be gained on cash ISAs, especially as last year's average return of 0.93% was found to be the lowest ever seen on our records. So, after such a tough year, are ISAs still worth investing in?

Cash ISAs starting 2018 on a better footing

A year ago, the average cash ISA rate sat at a low of 0.82%. Since then, it's seen several months of consistent rises, as a result of which the overall average now sits at a much-improved 1.09%. This could mean ISAs are worth having a look at again.

However, those who took out an ISA two years ago to take advantage of their tax-free nature will notice that rates were considerably higher back then. The table below highlights how "ISAs have been left crippled by low interest rates and Government schemes," according to moneyfacts.co.uk finance expert Rachel Springall.

In better news, rates across the savings market have increased for a twelfth consecutive month, as the number of rises continue to outweigh the number of cuts, with 237 rises recorded in December compared with 59 cuts. Of these, 80 rises and 11 cuts were for cash ISAs.

Yet, with non-ISA rates continuing to outpace their tax-free counterparts, savers may be ever more inclined to look away from ISAs. For instance, the best easy access ISA today pays 1.16%, while the best easy access savings account without a bonus sits at 1.30% from RCI Bank. Rachel points out: "The tax-free ISA allowance may remain at a respectable £20,000, but while the Personal Savings Allowance (PSA) remains in place, savers could get higher interest on savings accounts away from ISAs without paying tax.

"However, savers looking away from ISAs will miss out on the long-term benefits that holding one provides, particularly as there is no telling how long the PSA will last." As always, having both an ISA and non-ISA savings could be the safest way to go.

Alternative options

Regardless of whether you choose an ISA or non-ISA cash savings account, you are likely to see your savings eroded by inflation. With the Consumer Price Index (CPI) down from 3.1% in November to 3.0% in December, there's still not one single standard savings account that can beat or even match it.

Across 2017, CPI averaged out at 2.74%, which means it was three times as high as the average cash ISA rate of 0.93%. In contrast, the average stocks and shares ISA returned growth of 11.75% (according to Lipper data). This means that if you're looking for inflation-beating returns while keeping the tax-free benefits of an ISA, a stocks and shares ISA could be your best bet.

However, "savers who decide to invest their cash into investment funds must keep in mind that the value can go down as well as up and be vigilant of fund management charges," warns Rachel. "While the growth potential may well persuade some to consider this option, remember that past performance is no guarantee of the future."

If you're not sure whether the risk is worth the potential reward, you could seek advice from a professional who can assess your risk portfolio before you dive in. Remember also to give your investment time to grow – at least five years – as any product that invests in the stock market on your behalf should be considered a long-term savings vehicle.

For those who would rather stick with cash, Rachel advises consumers "to keep on top of the Best Buys and switch if their interest diminishes."

What next?

Compare cash ISA and regular savings returns to see which savings vehicle(s) would suit you best

Have a look at some stocks and shares ISAs or read our guide to see if investing could be for you.