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Rachel Springall, finance expert at MoneyFacts.co.uk, says another piece of good news is that inflation is starting to retreat, dipping from 3 per cent in January to 2.7 per cent in
February. “This means the gap between savings rates and inflation could finally be closing again.”
However, inflation is higher than even the best fixed rate bond, with Charter Savings Bank paying 2.25 per cent on £1,000 or above over five years.
Rates on the best easy access Cash Isas are lower, with Nationwide paying 1.30 per cent on £1. This compares to an average return on a Stocks and Shares Isa of 4.26 per cent over the past
year, although Springall warns: “This potential for higher returns does come with higher risk, as investing in the stock market could see savers end up with less than they originally put
in.”
Another reason Cash Isas fell out of favour is that from April 2016 the vast majority of savers could own tax-free interest on a standard savings account, thanks to the new personal savings
allowance (PSA).
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This means the gap between savings rates and inflation could finally be closing again.
This allows basic rate taxpayers to pocket £1,000 in interest each year free of tax, falling to £500 for higher rate taxpayers, so that 95 per cent pay no tax on non-Isa savings.
Many preferred to put their money in a standard bank account given that interest rates were slightly higher, as they still are today. For example, challengers Vanquis Bank and Secure Trust
Bank currently pay 2.65 per cent on £1,000 fixed for five years.
However there is little difference on variable rate savings accounts, which also start at 1.30 per cent with Virgin and RCI Bank.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says these may be dark days for savers but there are still good reasons to use your Cash Isa allowance.
“The tax breaks are cumulative, and as you build your savings and interest rates rise, the greater they become.”
Don’t lose faith If you are a basic rate taxpayer in a market leading account, you will start paying tax once your savings total £91,000, a figure that falls to £41,000 for higher rate
taxpayers.
If savings rates rose by 1 per cent these figures would fall to £48,000 and £23,000 respectively, Coles calculates. “Anyone building their savings for the future will be grateful they took
advantage of their cash Isa allowance when other savers lost faith.”
Whatever you do, do not simply take what is on offer from your local high street bank, where rates range from a high of just 0.55 per cent to a low of 0.1 per cent, says Anna Bowes at
SavingsChampion.co.uk.
“Challenger banks often pay much better rates, for example, Shawbrook Bank pays 1.25 per cent with no restrictions, and you get the same £85,000 protection under the Financial Services
Compensation Scheme."
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