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Savings rates up while inflation is down

Savings rates up while inflation is down

Category: Savings
20/03/2018

As we near the end of another tax year, savers may be pleasantly surprised to find that 22 providers have increased rates or launched new ISA deals this month to try and attract those still looking to make the most of their annual allowance. This is especially welcome as inflation has decreased in February, which means the gap between savings rates and inflation could finally be closing again.

Savings going up

It's not just the ISA market that has seen positive movement, as interest rates have risen across the savings market for the 14th consecutive month. This is thanks to the number of rate rises outweighing cuts, with 126 rises and 46 cuts recorded in February. Of the rises, 33 were for ISA rates.

With ISA returns continuing to improve this month, it's no wonder that the top easy access chart looks rather different from a year ago. Indeed, as you can see in the table below, the lowest offer on the list today, from Paragon, is still miles ahead of last year's top offering.

20 Mar 2018 - best easy access ISAs

20 Mar 2017 - best easy access ISAs

Provider Gross rate at £10k Provider Gross rate at £10k
Nationwide BS 1.30% Virgin Money 1.01%
Shawbrook Bank 1.25% NS&I 1.00%
Al Rayan Bank 1.22% Skipton BS 0.90%
Virgin Money 1.21% Post Office Money ® 0.90%
Nottingham BS 1.20% Coventry BS 0.90%
Paragon Bank 1.16% AA 0.86%

"It's clear to see that providers have been gearing up for ISA season this year," said Rachel Springall, finance expert at moneyfacts.co.uk. However, she adds "a word of warning to savers: don't expect the top rates to be around for too long if you are looking to grab an ISA before the tax year ends."

Cash ISAs still behind

Additionally, Rachel suggests that the easy access ISA market could do with a few more entrants, as there are currently only 74 providers, compared to the non-ISA easy access market's 97. And that's not the only difference between ISAs and non-ISA savings products. "For example, savers will find that many of the Best Buy two-year fixed rate bonds pay 2% or more, but 2% can't be found on two-year fixed ISAs," Rachel stated.

Cash ISAs and regular savings accounts are further outmatched by stocks & shares ISAs, with Lipper data showing that the average return on these accounts was 4.26% over the past year. However, this potential for higher returns does come with higher risk, as investing in the stock market could see savers end up with less than they originally put in.

Inflation down but still not enough

The risk may be worth it, as while the Consumer Price Index measure of inflation has seen a reduction – from 3.0% in January to 2.7% in February – it's still higher than even the current highest-paying fixed rate bond. This means that it's still the case that only stocks & shares ISAs, regular savings accounts and some high interest current accounts can outperform it.

With this tax year ending on 5 April and anyone who hasn't used their £20,000 ISA allowance losing it completely, it's worth remembering that you can open a new stocks & shares ISA while also contributing to a previously opened cash ISA, or vice versa. Read up on the ISA rules in our guides here, or have a look at our Best Buys here.

Rachel concludes: "As we have seen over 100 rate rises to ISAs since the start of 2018, it's worthwhile for savers to consider utilising their ISA allowance for the long-term benefits, and avoid any delay in applying for the top rates before the buzz of ISA season fizzles out."

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.

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