Nisas set to dash hopes of savers

HOPES that the launch of New Isas next month would spark fresh competition in the savings market appear to have been dashed, to the frustration of long-suffering savers.

The annual tax-free Isa allowance for adults rises 30 per cent to £15,000 from 1 July. Picture: Getty

All Isas will be rebranded as New Individual Savings Accounts (Nisas) from 1 July, under changes announced in the Budget that give savers a chance to stash more cash away from the taxman’s clutches.

The overhaul sees the annual tax-free Isa allowance for adults rise 30 per cent to £15,000 from 1 July, while savers will have the option of using all of the new allowance for cash. As it stands, just £5,940 – half the current 2014-15 allowance of £11,880 – can be held in cash Isas.

There will also be new flexibility to transfer money from stocks and shares to cash Isas, whereas the existing rules only allow transfers in the opposite direction.

The overhaul was expected to trigger an improvement in the cash savings deals available, as providers competed for the business of the many savers believed to be holding off using their Isa allowance until July. Recent weeks have seen a series of rate cuts, however, with Lloyds, Santander, Virgin Money and Tesco Bank among those pulling their best cash Isa deals from the shelves.

Kevin Mountford, Moneysupermarket’s head of banking, said: “The reality is that the introduction of Nisas has had little impact on competition within the Isa market, with very few products launched so far.”

“Many providers have been concentrating on updating their back office systems to cope with the change, with existing products being updated to allow the additional inflow of funds from the start of next month.”

But the coming weeks are unlikely to bring any improvement, warned Rachel Springall, of Moneyfacts.

“There may well be a couple of deals to grab the headlines around 1 July, but there is unlikely to be a stampede I’m afraid,” she said.

Bank and building society appetite for savings deposits has dwindled in recent years, not least because government initiatives have reduced their dependence on savers.

The launch of the Funding for Lending Scheme (FLS) in August 2012 was the catalyst for a dramatic decline in savings rates as banks and building societies were given access to cheaper finance and no longer needed savings deposits to fund their mortgage lending.

The average Isa rate has plunged from 2.55 per cent in June 2012 – just before the FLS launched – to 1.58 per cent now, said Moneyfacts.

The FLS was withdrawn for residential borrowing earlier this year, but as yet there has been no sign of a recovery in savings rates.

Instead, according to Springall, those seeking above-inflation cash returns may be better off turning to current accounts.

“Isas should always be the first account to consider because of the tax-free allowance,” she said. “Despite this, many savers may be opting for a higher return and may be swayed by cashing in their Isas and taking out either a regular saver or one of the top-paying credit interest current accounts.”

The interest paid on credit balances by the top four current accounts is higher than on any of the 190 instant access accounts available and outstrips 80 of the instant Isas on the market, even when the tax benefit is factored in, Moneyfacts figures show.

Another option is to take advantage of the new freedoms to move money between cash Isas and stocks and shares Isas.

With equities still strong and interest rates at rock-bottom – albeit now likely to rise before the end of the year – many cash savers are switching into stocks and shares Isas, according to Hargreaves Lansdown.

Danny Cox, head of financial planning at the firm, said: “Our analysis shows investors’ cash remains an important part of their plans, but they are finding the longer-term prospects of the stock market attractive for some of their cash.

“At the time of the Budget announcement, there was some speculation that large numbers of investors would use the new-found freedoms to transfer from stocks and shares Nisas to cash Nisas, but our investor survey suggests, if anything, the opposite is true.”

That shift back from markets to cash, which will be permitted under Nisas, is unlikely to happen until interest rates rise or markets become more turbulent, Cox added. “The Nisa products which offer both stocks and shares and cash options, with the ability to switch seamlessly between the two, will come to the fore.”