The Cash Individual Savings Account (ISA) has long been a fundamental part of the savings landscape in the UK. If savers did nothing else they would contribute to a Cash ISA. There are hundreds of Cash ISA providers and it takes moments to set-up, a simple search on the comparison sites will tell you where to get the best rates. But with the changes brought in by the government and a seventh year of record low interest rates this could be the end of the Cash ISAs reign.
The personal savings allowance
April saw the arrival of the personal savings allowance. Basic rate tax payers can now earn up to £1,000 in interest on their savings tax free, regardless of the account type. Higher rate tax payers can earn up to £500 tax free. A huge proportion of savers will not have to pay any tax on their savings making it easier for everyone to grow their wealth. That means you would need to earn about 3% in returns on your ISA allowance to make the ISA wrapper worthwhile. According to Money Saving Expert a higher rate tax payer would have to save over £38,461 in the top interest rate easy access savings account (1.3%) in order to go over their personal savings allowance. If interest rates were to rise more individuals would use their full personal savings allowance so it might not all be over. If you want to keep your money in cash some Cash ISAs still offer the best rates.
Falling interest rates
The Bank of England have kept the base rate at an historic low of 0.5% for seven years now. This has now filtered through to many providers such as banks and building societies and interest rates are at their lowest ever. This impacts Cash ISAs as well as other cash savings accounts. With interest rates no longer acting as a draw to the Cash ISA, interest rates across the board have fallen as demand has decreased, the Cash ISA is no longer the competitive space it once was.
Interest rates on current accounts
The current account space is getting increasingly competitive. The current account switch service was launched in 2013 making it easier and quicker to change your current account provider. This has increased the individual’s ability to exercise choice and banks have been working on their product offering to ensure they are that choice. Some providers offer as much as 3% interest on current accounts if a certain amount is held in them, this is double the top Cash ISA interest rate.
The Stocks and Shares ISA
Cash ISAs have historically beaten their investment competitor as they offered a fixed rate of interest so individuals knew how much their savings would grow by. Now that fixed rate is so low many savers are moving to a Stocks and Shares ISA.
Whilst the value of your investments can go up or down and the amount you take out could be less than what you put in, the Stocks and Shares ISA often offers stronger long-term returns. In fact, research we conducted earlier this year showed that UK Savers choosing to keep their savings in cash are losing £4.1billion a year to inflation, which translates to roughly £130 a year for each saver.
The good news for savers everywhere is that Stocks & Shares ISAs can be really simple. Our Head of Investor Consultants, Henry Black, explains the ISA.