Check your Isa - it may be a flop too as banks slash interest rates
For all the hype over the new accounts, Simon Read finds banks aren't rising but lowering themselves to the occasion
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Friday 04 July 2014
This was the week that savers and investors had been waiting for: the launch at last of the new Isas, which promise much higher allowances – a tripling of the limit for cash Isa savers – and greater flexibility.
But for one Independent reader at least, the development has been much less positive, despite a massive Treasury campaign to promote the so-called super Isas, launched by Chancellor George Osborne in the March Budget. Oh, and not forgetting the rash of new launches that banks and building societies rushed out after the new rules came into force on Tuesday.
James Simpson was contacted by his bank this week with some exciting news. An email headed "Your Instant Access ISA is changing" arrived from the taxpayer-owned Royal bank of Scotland. It went on to say, somewhat breathlessly: "Making the most of your tax-free allowance in a cash Isa is a great way to save and you'll soon have the opportunity to save even more tax-free when the allowance increases to £15,000."
"Great!" "Opportunity!" These marketing people certainly know their way around the positive dictionary, don't they? But they also know how to bury bad news. For that was what the real message of the email contained.
James's instant access Isa is indeed changing, but for the worse. From the start of next month, the rate paid out is being slashed by a quarter
The account is already paying a paltry 1 per cent and will fall to what may well be a new low of 0.75 per cent.
James was not terribly pleased by the "change". He said: "I am seriously thinking of keeping my money in a box under my bed."
Who can blame him? What's the point in taking advantage of these accounts if the rates they pay are far from attractive?
Mr Osborne claimed this week: "The introduction of the new Isas [Nisas] is a big boost for millions of people, giving them greater economic security by putting aside money in savings."
Putting aside the fact that there are millions of people who can't actually afford to save, and so can't take advantage of the tax-free opportunity that the Chancellor has created, there's little real encouragement for those who do have a nest-egg to stick it in an Isa. Rates on standard accounts have been shrinking for some time. The average cash Isa interest rate is now just 1.58 per cent, according to number-crunchers at Moneyfacts, when a year ago it was 1.74 per cent.
Even the Government's own official figures show that banks have slashed interest rates paid since the new super Isas were announced by Mr Osborne.
A report published on the Bank of England's website showed that the average rate on cash Isas fell from 2.07 per cent in March to 1.84 per cent by May.
And if James Simpson's experience is widespread, it looks like things are only going to get worse.
What's the justification for cutting the rates paid? Here's RBS's interesting explanation: "Savings interest rates in the UK marketplace have continued to go down. Because of this, we reluctantly need to make changes."
Maybe we should translate that into English. What do you think RBS means when it refers to the "UK marketplace"? It means the banks and building societies that offer Isas. Banks such as RBS.
If saving rates in the UK marketplace have gone down, that's because banks and building societies have put them down. Banks such as RBS.
In other words, RBS is justifying its decision to slash rates by blaming actions that it – and its rivals – have already taken in reducing rates.
Once you know that, you understand that the bank's use of the word "reluctantly" is not strictly true. Because it is a key part of the marketplace, it can choose where rates go. It has chosen to penalise its customers by putting them down at the moment.
Of course all the other banks and building societies are equally guilty in creating the worst rates for savers in living memory – as much as they try and point the finger at others for the woeful returns.
The new dawn heralded by George Osborne has yet to rise (AFP/Getty Images)
However, that doesn't mean you should ignore Isas. Because of their tax-free status, they still offer better returns than standard accounts, which are equally woeful at the moment.
The near trebling of the cash Isa limit from £5,760 in 2013-14 to £15,000 in the current 2014-15 tax year is significant.
Coupled with the increased flexibility offered by the new Isas, investors should be channelling as much of their nest-egg as they can into the tax-free wrappers.
Bear in mind that if you're a basic-rate taxpayer, the return you can get in an Isa is worth 20 per cent more than it would be outside because of the tax effect. If you're a higher-rate taxpayer, it is worth 40 per cent more.
There's also the attraction of that new flexibility, with the new Isas allowing you to switch all your holdings between shares and funds and savings accounts.
Up until now you've only be able to move money held in an Isa from savings accounts to equity-based investments. You're now allowed to move back the other way, if you wish. And then back again, and so on.
That's ideal for those who want to be able to retreat from the stock market at certain times, but plan to go back.
In fact, figures published by the Investment Management Association this week suggested that there's a wealth of cash waiting to be invested in funds through new Isas.
They showed that sales of Isas through fund companies and platforms were worth £98m in May, less than half what they were 12 months earlier, when investors put in £204m.
The figures echo similar ones published by the British Bankers' Association last week. They showed a massive drop in the amount that people have been stashing in cash Isas in the past three months: savings stood at £5.3bn, down by more than a third on the same period in 2013.
With all that pent-up demand, money will certainly flow into Isas in the next few weeks, but banks and building societies really need to decide – even if it's "reluctantly" – to move the market in a more positive direction by offering decent rates.
"The changes introduced in the Budget gave savers a glimmer of hope and incentivised people to put more money aside each month," said Neil Lovatt of Scottish Friendly.
"However, the cash Isa market has not risen to the opportunity, instead choosing to offer low interest rates or actually reduce rates in fear of overly high inflows."
That's not fair to savers. If you already have a cash Isa, the chances of its rate being cut seems quite high despite the Nisa hype this week.
For this reason, check that the return you're being paid hasn't been reduced to insulting levels. If it has, don't take your money out to put in a box under the bed, as James Simpson plans, but find an account that does pay a little more – and then wait for better deals to emerge.
Meanwhile, the annual limits for kids' tax-free accounts – child trust funds and Junior Isas – have been increased to £4,000 from their previous levels of £2,400.
And Isas are expected to allow peer-to-peer loans to be held within them in due course, with the Government consulting on how to implement that right now.
New Isa deals: Where to stash cash
There has been a constant stream of new cash Isa launches this week. First out of the blocks on Tuesday – when the new Isa rules came into effect – were Clydesdale and Yorkshire banks with a 2.45 per cent fixed-rate bond, the drawback being that you have to lock your money away for 40 months.
The only real light at the end of the tunnel for savers is the promise of rate increases, which could come before Christmas if you believe the intimations made by the Bank of England Governor Mark Carney a few weeks ago.
He has also predicted a return to an environment where 3 per cent is the norm for the Bank base rate, compared with the 0.5 per cent record-low level at which it's stood for the past five years.
But for that reason you may decide against a long-term fixed-rate deal where the offer could start to look a little less attractive if interest rates generally start to climb.
Halifax and Skipton made small increases on their Isa rates this week, with a range of other fixed deals being offered. The AA launched a two-year fix at 2 per cent, for example, while Saga's one- year fixed deal pays 1.55 per cent. Others should follow, so it may be wise to wait.
Bank finally sees sense over £6,000 charge for redeeming mortgage two days early
Five Questions On: GB Energy's new tariff
Questions of Cash: 'I want a refund on my TV licence payments but they've turned my claim into a soap opera'
Bank-beating exchange rates on your international payments
Be warned of the dirty tricks the bailiffs pull
- 1 Malaysia issues arrest warrant for Gordon Brown’s sister-in-law after she publishes stories on leader Najib Razak's financial affairs
- 2 Porn block in India: hundreds of sexual websites banned, internet outraged
- 3 Natalia Molchanova: World's most successful free-diver missing and feared dead after disappearing in Mediterranean
- 4 Dutch King Willem-Alexander declares the end of the welfare state
- 5 Gamers confess the worst things they've done in The Sims
Is Britain really full up? Are migrants taking our jobs? Leading academic answers the most common anti-immigration claims
Calais Migrant Crisis: Deputy Mayor of Calais labels Cameron's use of 'swarm' as 'racist' and 'ignorant'
Chris Leslie: Jeremy Corbyn's anti-austerity agenda will harm the poor, says Labour shadow Chancellor
Jeremy Corbyn: Tony Blair could face war crimes trial over 'illegal Iraq invasion'
Landlords renting properties to illegal immigrants to face up to five years in prison
While we fixate on Calais, the Home Office is quietly deporting dozens of migrants on 'ghost flights'
iJobs Money & Business
£35 - 38k + Benefits & Bonus: Guru Careers: We are seeking an Account Manager ...
£20000 - £25000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£50 - 80k: Guru Careers: We are seeking an Associate Director for the Markets ...
£60 - 100k: Guru Careers: Our client is looking for an Associate Director of S...
Day In a Page
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.