Savers are facing rock-bottom returns on cash Isas as banks slash their rates in what experts say is an unprecedented move, just three weeks into the new tax year.
Banks and building societies typically use this period to attract deposits from savers keen to set aside all or part of their annual Isa allowance early in the year to start earning interest. However, last week Santander cut the rate on its Direct Isa Saver for new customers from 1.6% to 1.2%.Metro Bank reduced the rate on its easy-access cash Isa to 1.4% for new savers, down from 1.65%.
Rachel Springall, from data provider Moneyfacts.co.uk, says: “It is highly unusual for providers to be cutting rates now – it’s been such a short window since the start of the new tax year.”
Santander has also cut the rate on its Isa Saver, the account it shifts loyal savers into after they have been in the Direct Isa Saver for a year, now paying 1% on balances of £10,000, down from 1.5%. The rate on £25,000 and over has sunk from 2% to 1.5%.
“Savers are desperately trying to get the best tax-free savings rates they can, but this has meant too much money has been poured into best buy deals for the providers’ liking,” says Andrew Hagger at the MoneyComms.co.uk website. “Once they’ve had their fill, they simply cut their interest rate and drop down the table to reduce demand – it’s a bit like switching the taps on and off.”
Fixed-rate Isa rates have also started to fall. Skipton has cut its one-year fixed deal for new savers to 1.4% from 1.6%, while Santander has cut its two-year deal to 1.8% from 2%.
The cash Isa allowance for this tax year – which started on April 6 – is £5,940. However, 1 July will see the birth of the “NIsa” when the allowance for each saver rises to £15,000.
Hagger recommends fixed-rate Isas for a better return; Halifax is paying 2% for its 18-month fix. “With rate rises on the horizon it’s questionable whether it’s wise to lock in for a longer term,” he says. He adds that some current accounts are worth considering for higher rates. Santander is paying 3% on its 123 account on balances of up to £20,000, equating to 2.4% after basic-rate tax.
Latest figures from Revenue & Customs for the 2011/12 tax year show that nearly half the UK adult population have a cash, stocks and shares Isa, or both, at an average value of £16,490. Of this figure, more than 16 million savers have only a cash Isa, with an average value of £7,620. Around 2.7 million hold only stocks and shares Isas, with an average value of £29,520.