Bad news for savers as it has been revealed that interest rates on savings accounts, as judged by the average easy access cash ISA, have reached a record low of 1.06%
Savings rates have been steadily falling over the past few years, as the Bank of England base rate has remained at its low 0.5%. a low interest environment is generally seen as good news for borrowers but bad for savers, a diagnosis that is proving more and more true as time goes on.
Back in January 2013, the average easy access cash ISA would pay out interest at 1.52%. By the same month the following year, this had fallen to 1.25%, and in 2015, the average rate had fallen to 1.13%. Now, as of this January, we have “hit another record low” of 1.06% according to Moneyfacts, who published the data.
And to make matters worse, while average rates have fallen by 0.46% since 2013, if we look at the top of the market, rates have actually fallen by even more.
“Back in 2013,” said Charlotte Nelson of Moneyfacts, “the top paying easy access ISA paid 2.75% yearly, but the best rate today is only 1.5% – a significant 1.25% less.”
The easy access ISA is used as representative of the savings market generally, and accurately so, as Ms Nelson said, “standard easy access savings accounts don ‘t fare any better” than their tax-free counterparts.
The top rates for a standard easy access saver have fallen from 2.33% back in 2013, to 1.65% this year.
ISA rates are typically lower than those on a standard savings account because the interest earned on the balance of a cash ISA is not taxable. However, this unique appeal of the cash ISA will not be unique for long as next year will see the introduction of a tax-free personal allowance on all savings accounts that was announced in March 2015.
This will mean that those on the basic rate of income tax (i.e. those who earn under £42,700 a year) will be able to earn £1,000 in interest each year without paying tax. Those earning more than £42,700 a year will also have an allowance, but of £500. This change will effectively render ISAs redundant for those on basic rate tax as breaching the £1,000 tax-free interest limit would require a savings balance of more than £60,000 in the top paying easy access saver (with an interest rate of 1.65%).
While conventional cash ISAs look like they will lose a large part of their appeal, the newly launched Help-Buy ISA should ensure that the financial products won ‘t fade into insignificance entirely.
Designed to help first time buyers get on the property ladder, Help-Buy ISAs offer their holders a government backed bonus of 25% of the ISA balance to use towards a deposit on a home.
The bonus has a cap of £3,000 (which would require a balance of £12,000 in the ISA), and the smallest amount that can be paid out is £400, meaning that a balance of at least £1,600 is required in order to gain any of the bonus.
Importantly though, the limits imposed are per person, so anyone friends or partners who wish to live together could enjoy a bonus of £6,000 towards their deposit.