New research from Which? shows that cash Isas are no longer paying much better rates than standard savings accounts despite their tax-free status.
Over time the gap between cash Isas and standard savings accounts has narrowed enormously. In 2000, a year after Isas were launched, the difference between the average cash Isa and savings account was almost 2.8% – now it’s just under 0.5%.
With just over a week to go to the cash Isa deadline for 2011/12 it’s imperative that you get the very best rate on your savings.
The closing cash Isa gap
Which? research tracked the rates on all the instant access cash Isas and ordinary instant access savings accounts each year from February 2000 to February 2012 to see how they compare.
In February 2000, the average instant access cash Isa rate on a balance of £3,000 was 6% – which would pay out tax-free interest of £180 a year. This compared with an average rate of just 3.21% on a standard savings accounts before tax – leaving a difference of 2.79%.
Today, however, there is barely a difference between cash Isa rates and standard savings rates. As of February 2012, the average cash Isa rate was only 0.44% higher than the average standard savings rate.
Cash Isa woe
Which? money editor James Daley said: ‘Getting a decent rate on your savings has been nigh on impossible over the past three years. But as rates have sunk to rock bottom, cash Isas should, in theory, be coming into their own – sheltering any interest from tax and helping savers to grow their money just a little bit faster.
‘Instead, quite the opposite has happened – as an increasing number of providers have started offering cash Isas that pay less than their other taxed savings accounts. This removes the incentive that Isas were designed to provide, and limits savers’ options. Our concern is that people’s perceptions of cash Isa rates may not have kept up with reality, leaving many unwittingly earning a pittance on their hard-earned cash.
‘Many savers understandably assume that they will be better off in their bank’s cash Isa than they will in a taxed savings account – but all too often, that just isn’t the case. We’d like to see all banks and building societies promising to ensure their cash Isa accounts pay at least as much as their equivalent standard accounts after tax – if not significantly more – so that Isas once again provide people with a real incentive to save.’