/ Money

Cash Isas: from hero to zero?

Coins grow into savings

From warmly welcomed to washed up; it’s been a rocky 15 years for cash Isas. They were launched by the government in 1999 to encourage us to save, but with rates at rock bottom, that incentive has all but disappeared.

The tax-free status of cash Isas has ensured their enduring popularity – a record £40.9bn was deposited in them in the 2012/13 tax year. But savers today can only dream of the kind of returns available when they launched back in 1999 – the best cash Isa back then offered 6.5% interest. There’s no doubt that the darling of the savings world has lost its sparkle.

Cash Isas vs ordinary savings accounts

Historically, interest rates on cash Isas have easily outstripped those on ordinary savings accounts, but this is no longer the case. There are now several ordinary savings accounts that pay more than cash Isas, even after tax.

In fact, our latest research found that savings providers have made a total of 343 cuts to rates on their instant access saving accounts and cash Isas since August 2012, despite the Bank of England base rate being stable at 0.5%.

These rate cuts add insult to injury for savers who have seen returns plummet since the financial crisis began. In January 2008, before the financial crisis came to a head with the collapse of Lehman Brothers, the average instant-access cash Isa rate was 5.39%, much more than the 4.16% average offered by standard instant-access accounts. But the average cash Isa has plummeted to 1.28%, with the savings rate not far behind at 0.63%.

To put this in cash terms, if you invested the full £3,000 allowance in a cash Isa in January 2008, you’d have earned £161.70 on average in tax-free interest over a year. Today you’d earn less than half that (£73.73) if you invested the current tax year’s maximum of £5,760, even though this is almost double the 2007/08 allowance.

Gloomy cash Isa season

This is traditionally the time of year when cash Isa providers battle to boost business by upping rates and launching new products ahead of the new tax year, but savers are currently experiencing one of the worst Isa seasons, with limited choice and paltry rates.

Poor rates aren’t the only problem; we feel the entire savings market at the moment is designed to take advantage of consumer inertia. To help customers get the best deals, we want providers to display interest rates alongside the account balance on online statements and to send customers an annual summary showing details of all the accounts they hold.

Are you still saving into a cash Isa despite low rates? Or have you moved your money in search of a better return?


I’m still putting into Cash ISAs, simply as they were (for me) longer term investments anyway. As you can’t roll the allowance forward year after year, when rates do go up (if they do) then having the money tucked away will be a benefit. That said the rate available generally for Cash savings is pretty poor so there isn’t really much being lost between the isa rates and non-isa rates.

I do however don’t understand why there are more non-isa’s offering more than the isa rate, surely in terms of cost of running the scheme it can’t make much difference to the banks, so you’d expect a rough parity between the range of rates available in the products.

Jenny says “. . . the average cash Isa has plummeted to 1.28%, with the savings rate not far behind at 0.63%”. “Not far behind . . .” ?? To my befuddled brain it looks like 50% behind, in other words the ISA rate is more than double the ordinary savings rate. If you can put away the maximum in an ISA you’ll get much more than you would from the same amount in an ordinary account. With savings interest rates bumping along the bottom generally you can’t do much better than that on the high street.

The origins of the ISA lie with the TESSA [tax exempt special savings account] introduced in 1990. They were a superior product in a number of ways. ISA’s replaced them and had extra strings attached. Perhaps the days of the ISA are now also numbered.

The problems for savers are [a] that the handy places like the building societies no longer need our money like they used to for funding mortgages, and [b] they haven’t learned to live on a narrow margin between savings and lending rates, despite new technology and the closure of thousands of outlets. They probably attribute this to the higher cost of regulation and compliance in the wake of the Northern Rock débacle.

“interest rates on cash Isas have easily outstripped those on ordinary savings accounts, but this is no longer the case.”
According to March Which? Money:-
Instant access cash ISAs: best rates 1.45 to 1.7%. Market average 1.24 to 1.33%
Ordinary instant access accounts: best rates 1.36 to 1.5%. Market average 0.54 to 0.65%.
So I don’t follow the argument as it seems ISAs do, in fact, beat ordinary savings – double the average rate (if you were a salesman!). Even 1 year fixed rates are marginally better.
You cannot compare rates of 6 years ago with today.
To get higher returns than the norm you need to be prepared to take more risk – so if you are saving for the long term use a stocks and shares ISA.