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 It is now over 6 months old so the content may be out of date.

Published: 05/09/2017
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The importance of using cash ISAs for their tax-free perks is well-known, yet unfortunately the returns on these vehicles have significantly diminished over the last few years as contrasting Government initiatives – particularly the Personal Savings Allowance – take their toll.

In fact, our latest research shows that the cash ISA market has deteriorated at such an alarming rate that fixed rate bonds are now far superior when comparing both average returns and the best available deals, something that wasn't always the case a few years ago, when the gap wasn't nearly as wide – and in some cases, cash ISAs gave bonds a run for their money.

The table below shows that, while both cash ISA and non-ISA rates have fallen considerably in recent years, it's cash ISAs that have suffered the greatest losses, with both average rates and the best rates available now well below their non-ISA counterparts.

Average Savings rates Sep-12 Sep-15 Today
Two-Year Fixed ISA 3.07% 1.69% 1.08%
Two-Year Fixed Bond 3.17% 1.80% 1.37%
Five-Year Fixed ISA 3.89% 2.39% 1.68%
Five-Year Fixed Bond 3.73% 2.63% 1.93%
Best Deals Sep-12 Sep-15 Today
Two-Year Fixed ISA Mansfield BS - 3.55% Coventry BS - 2.05% Al Rayan Bank - 1.70%*
Two-Year Fixed Bond Shawbrook Bank - 3.74% Aldermore - 2.35% Al Rayan Bank - 2.20%*
Five-Year Fixed ISA BM Savings - 4.05% United Bank UK - 2.68% Virgin Money - 2.15%
Five-Year Fixed Bond State Bank of India - 4.50% United Bank UK - 3.23% Vanquis Bank - 2.50%
Source: 05/09/2017 *Expected profit rate

"It's shocking to see just how much interest has been lost on ISAs in the last few years," said Rachel Springall, finance expert at "Savers may have turned to ISAs for their tax-free benefits, but thanks to the Personal Savings Allowance (PSA), that appeal has diminished and could well be deterring new investors."

That certainly seems to be the case, with figures from HMRC showing that the desire for ISAs is clearly diminishing: the amount of new money invested in cash ISAs fell by £19.5bn from the 2015/16 tax year to 2016/17, but given the state of the market at present, it's little wonder.

"In 2015, before the PSA was introduced, savers could get an average two-year fixed ISA rate of 1.69%, but today this has dropped to 1.08%," said Rachel. "In contrast, the average two-year fixed rate bond paid 1.80% in 2015 but now pays 1.37%, so while it has also fallen, it sits significantly above the average ISA rate."

The differences are even more marked when looking at the five-year sector – particularly when you consider that the average cash ISA rate used to beat the average bond rate – which means those looking to invest over a longer term and who choose an ISA instead of a bond will be seriously missing out.

After all, the best five-year fixed bond pays 2.50% from Vanquis Bank, whereas if you take out an ISA then the best you can currently get is 2.15% from Virgin Money. Our calculations show that this would mean a loss of £383.70 in interest over five years (when compounded annually) based on a £20,000 investment, a huge sum of money to miss out on.

"The choice in cash ISAs is also falling, with over double the number of two-year fixed bond options at 168 versus just 70 options for two-year fixed ISAs," continued Rachel. "Savers are much more likely to find a better return on a bond compared to an ISA, too: 43% of two-year fixed bonds on the market (73 of them) pay over 1.50%, but there are only three two-year ISAs that can boast the same, a measly 4% of this sector.

"It's clear to see that the ISA market is in dire need of a boost in competition to encourage new investors, but while the PSA remains, it's going to be hard to convince savers to once again consider ISAs as their first choice."


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