The outlook for cash savers continues to deteriorate almost six years after interest rates were slashed to an all-time low.
Savers hoping for an improvement in the returns paid on their cash accounts have been told that it’s not on the cards, with the so-called ‘Isa season” likely to prove a damp squib.
Rachel SpringallThe Isa season is unlikely to be promising this year
Banks and building societies that previously competed to attract deposits are yet to recover their appetite for savings cash. Instead they are concentrating their efforts on current accounts that allow them to “cross-sell” customers into other products or charge regular fees.
Some now pay much higher rates on current account in-credit balances than on their top cash Isas, including Santander and state-backed Lloyds and Halifax.
Early March used to be the start of the Isa season, when banks and building societies would launch new deals in a bid to capture savings cash. But that has died away since the Bank of England cut interest rates to a record low of 0.5 per cent on 5 March 2009, the sixth reduction in as many months.
Markets now expect the next rise to come in early 2016 and the Bank of England indicated this week that a further cut couldn’t be ruled out.
Some £12 billion is held in easy access cash Isas paying less than 0.5 per cent, a study by the Financial Conduct Authority recently revealed, and banks including Royal Bank of Scotland and Lloyds have in recent weeks further reduced the interest paid on some accounts.
It had been hoped that the launch of the NS&I pensioner bonds last month would stimulate fresh savings competition. However, it appears to have had the opposite effect and the Isa season is unlikely to check the downward trend.
Rachel Springall, finance expert at Moneyfacts, said: “The Isa season is unlikely to be promising this year as these deals are just another savings account to the banks so they are not immune to rate cuts.
“Until the banks want savers deposits the market is unlikely to improve, so all that savers can really look forward to is an increase to the annual allowance.”
Isas should always be the first choice of savings account due to their tax-free status, yet the best rates are currently offered by current accounts. Six years ago the main high street brands offered an average of 1.85 per cent on easy access Isas, with the best paying 3.2 per cent, according to Moneyfacts. The average current account paid 1.3 per cent, with the highest at 2.96 per cent.
“Today, the tables have turned completely because new customers can get so much more from current accounts,” said Springall. “The main high street brands that do offer interest on current accounts pay three times as much in interest as their Isa on average for new applicants.”
Santander’s 123 current account pays 2 per cent and 3 per cent (aer) on balances of £2,000 and £3,000 respectively. In contrast the bank’s easy access Isa now pays just 1 per cent, down from 1.75 per cent two years ago and 2.3 per cent in 2009.
Similarly, Nationwide current account customers can receive 5 per cent (aer) on balances up to £2,500 (for the first 12 months, provided they pay in £1,000 a month). The best easy access Isa rate that the building society offers is just 1.25 per cent, Moneyfacts data show.
Lloyds and Halifax also offer current account customers better cash rates than those in their easy access Isa products.
“The banks offer lucrative deals on current accounts to entice new customers, as banking customers can then be offered an array of different products,” said Springall. “With savings rates always changing savers need to keep on top of the best deals out there and switch when necessary.”