THE average cash ISA is paying below one per cent for the first time ever, putting even more pressure on savers who can no longer find inflation-beating returns on the high street.
According to new data from Moneyfacts, the average easy-access ISA rate is now just 0.73 per cent, down from 1.09 per cent a year ago – meaning that banks have been slashing cash ISA rates by an average of 0.36 per cent, far lower than the 0.25 per cent base rate cut over the same time period.
Meanwhile, the Financial Conduct Authority (FCA) has warned that many savers are earning zero interest on their ISA money, as it forges ahead with its so-called ‘sunlight remedy’, a three-part plan to shine a light on consumer accounts and banking behaviours.
This is a double dose of bad news for savers who once believed that cash ISAs represented a safe option for their savings. With inflation now at 0.9 per cent and expected to rise to 2.7 per cent in 2017, any money which is being kept in a cash ISA account is set to lose value over the next year.
In an effort to drive value for consumers, the FCA has published the lowest cash ISA rates across 32 different providers, alongside a new series of rules which should improve transparency among banks. Cash ISA providers will now have to provide easy-to-understand key information on savings accounts at the point of purchase and they will also have to clearly remind consumers about changes in interest rates or the end of an introductory rate. Banks will have to offer a faster and easier switching process, in line with the FCA’s aim to see a minimum of 80 per cent of cash ISA transfers carried out within seven days.
“The new rules coming into force today will help consumers get the facts they need to make an informed decision about what to do with their savings,” said Christopher Woolard, executive director of strategy and competition at the FCA. “In a well-functioning market, providers should be competing to offer the best possible deal to consumers. Our sunlight remedy data shows that some consumers could be better off by opening a different account. One of our regulatory priorities is the treatment of long-standing customers and we want to see all customers benefit from competition and innovation in financial markets.”
However, savers are still stuck for choice when it comes to interest-paying cash ISAs. While easy-access ISAs offer the least value for money, fixed-term ISAs are not performing much better. One year fixed-rate deals are now paying an average of 0.87 per cent, down from 1.46 per cent last year, while longer-term rates are down to 0.98 per cent, from 1.98 per cent one year ago.
Recently, Sainsbury’s Bank withdrew its above-average 0.95 per cent ISA, while the M&S Bank advantage rate will fall from a relatively generous 0.8 per cent to 0.5 per cent in February. Meanwhile, the Halifax instant ISA saver and Lloyds cash ISA rates are both dropping to 0.05 per cent next week – far below the Bank of England’s base rate of 0.25 per cent.
With cash ISAs no longer representing value for money, consumers will be forced to take on more risk if they want to see decent returns. The alternative finance sector has already seen a surge of new interest as a result, with peer-to-peer financing proving to be a particularly popular investment choice. The recently introduced Innovative Finance ISA is especially attractive to retail consumers as it allows investors to take advantage of robust returns from the P2P sector within the familiarity of the tax-free ISA wrapper.