Coalition lending plan hits ISA savers

Looking to stash cash in a tax-free home? There are slim pickings

The traditional ISA season ahead of the tax deadline in April looks set to disappoint this year with experts predicting lower savings rates than ever being offered by bank and building society individual savings accounts.

The problem is that the Government's Funding for Lending scheme has been a disaster for savers.

The scheme gave lenders £80bn-worth of cheap money to lend to home buyers and small businesses. That improved things for borrowers, but led to a fall in wholesale money market rates. The scheme effectively means that banks don't need to offer savers decent rates because they can borrow more cheaply on money markets.

"The Funding for Lending scheme has had a terrible impact on savers – the rates of the best buy easy access ISAs available for new customers have fallen by up to 1 per cent since the ISA season last March, even though there has not been a change to the Bank of England base rate," pointed out Anna Bowes of the rates analysts Savings Champion.

"Unless anything changes between now and the end of March, lenders are unlikely to show a desire to offer top rates to pull in new money," she warned.

In the current 2012/13 tax year you can put up to £11,280 in an ISA, with half (up to £5,640) allowed to be held in a cash deposit account. The remaining allowance must go into investment funds or stocks and shares.

But there's been major disappointment for those looking out for tasty ISA deals so far this year, said Sylvia Waycot, editor at Moneyfacts.co.uk. "New ISA accounts normally hit the market with a flurry of razzmatazz in early January, but we are already in February and only a few accounts have trickled quietly into the market.

"Normally we would expect to see providers trying to grab our attention with headline rates but this year, while rates on some accounts have gone up, they have not generally risen by as much as they were recently reduced by."

The rates on fixed rate ISAs – normally extremely popular with lenders as they have been able to use them to entice in new customers with short-term attractive deals – have slumped in the last 12 months.

The best rate available across the country for a one-year fixed rate ISA is currently just 2.05 per cent from Nationwide (although London-based Metro Bank is offering a 2.25 per cent deal to customers of its branches). The rate is paltry compared to the top deal of 3.5 per cent offered last April.

Moneyfacts reports that a year ago there were 385 cash Isas paying an average interest rate of 2.55 per cent; currently there are just 309 on offer and the average rate paid has fallen to 1.74 per cent.

But it's not been all bad news for savers in recent weeks, pointed out Anna Bowes. "We have actually seen moves to increase the interest being earned on older poor-paying accounts," she said. NS&I is moving its old Cash ISA and Cash ISA T accounts that currently pay just 0.5 per cent into its Direct ISA which pays a competitive 2.25 per cent.

Meanwhile the Coventry Building Society is increasing the rates on all its easy access cash ISAs from between 1 per cent and 1.2 per cent to 2.5 per cent for its customers.

"This could herald a move that rather than focusing on gaining new customers, some providers may simply try not to lose them," Anna Bowes said. "This would be great news for the millions of savers who never get around to switching their old savings accounts."