Is this the end of the cash ISA?

By Vanessa Chance

With the end of the tax year looming, it is ‘ISA season’ in the personal finance world. Providers are working hard to remind savers that they only have a few weeks left to use up their ISA allowance for the year and soon they will be promoting their new products for the next financial year. However, with interest rates at pathetically low levels and a personal savings allowance (PSA) that means most savers, except the very richest, don’t pay tax on savings interest, you have to wonder if this is the end of the cash ISA as we know it.

At the time of writing*, the best buy cash ISAs available today are the Instant Access ICICI Bank UK HiSAVE Savings Account and the Instant Access ISA from Punjab National Bank Variable Rate Cash ISA. Both of these are offering just 0.50%, which is a fraction of the 2% interest that the best buy regular saver from West Bromwich Building Society is offering. Even if you exceed the PSA threshold and have to pay tax on that 2%, for the majority of people that is still better than what the ISA can offer.

For clarity, the PSA is the amount of interest you can earn on savings without paying tax and it is tiered according to the amount of income tax the saver pays. Basic rate taxpayers may earn up to £1,000 in interest tax-free each year and higher rate taxpayers can earn up to £500 a year. There is no PSA for anyone those earning over £150,000 a year.

Bearing in mind that the best buy instant access savings accounts are offering around 0.5% at the moment, a basic rate taxpayer would have to have at least £200,000 worth of savings before they would be taxed on the interest and a higher rate taxpayer would have to have £100,000. Unless you have this kind of cash sitting around, there is no real benefit to having a cash ISA any more.

I can remember when ISAs were launched in 1999 and I remember opening one a few years later when I got my first salaried job. They paid similar interest rates to mainstream savings accounts but as they weren’t taxed they were a better deal for most.

I can remember the bank teller giving me the application form and pen and explaining to me that there was a limit on what could be paid in during the financial year. They also warned that if I made any withdrawals, I would lose my tax-free allowance on them. It seemed a strange sort of restriction but it somehow made me more protective of the money that was in this account.

In all honesty, that feeling didn’t last long. My twenties were spent ignoring all the good financial – and life – advice I’d been given and just living for the moment. I didn’t really understand the need to save until I was almost 30 and needed a deposit to buy my first home. At that point, Santander offered a wonderful homesaver account that paid 8% interest – imagine that now! – but it was limited to a fixed amount each month. Once I could save more than that the next best place for my money was an ISA, at which point the Barclays Gold ISA was the best buy offering around 2% then, I think.

When I speak to younger colleagues and family who are just starting their savings journey, I feel sorry that they do not have the benefit of interest rates that don’t start with a zero. Having a decent interest rate is a good incentive to save and helps you see your money grow quicker, which in turn motivates you to save more. ISAs used to have the added discipline of making you protect your savings rather than spend them but at sub-inflation interest rates, their appeal is limited now.

I have been looking at the alternatives and there are a few ways you can make money from your money while still keeping it in cash. There are several regular savings accounts where you must commit to paying a fixed sum each month, the best on offer currently is the regular saver from West Bromwich Building Society, which is offering 2%. Other options include current accounts, of which the best is from Virgin Money right now offering 2.02%, although current accounts often require a minimum amount is paid in each month and will have a limit on the amount interest is paid on.

Another option is a notice account, where you tie your money up for a period, at least a year usually, and get a better interest rate. These are not as bad as they sound as you can usually get your money instantly if you need to but will lose out on the interest if you do. The best of these is from Turkish Bank (UK) Ltd, offering 0.6% on 1 year accounts and 0.8% on 2 year accounts. All of these have terms and conditions attached to them but my point is, there are still ways to get some interest on your cash savings.

This last year has brought so much change to the world and things will be very different going forward. I do wonder if along with commuting and shaking hands, this is the end of the cash ISA too. Things I didn’t think were possible a year ago are just normal now and many of them wonderful in their own way. With all the options available to savers in a low interest environment, the ISA seems irrelevant now.

*Data sourced from Defaqto, the leading financial information, ratings and fintech business, on 17 March 2021. Please note that products change frequently and the data cited is correct at the time of writing. Terms and conditions may apply to these products.