2nd November 2015 by BruceDavis
It’s a punchy statement to make, but cash ISA could very soon begin to fall in popularity among British savers.
The reason for this is three-fold, and they’re all interlinked:
To begin with the obvious: interest rates on cash ISA, whether easy access or fixed, have been at historically low levels for years now.
Currently, the best rate* easy access ISA pays 1.56% AER – but with a limited number of withdrawals. The best rate on a fixed account is 2.4% AER.
These rates are well below the average in 2007, which was 5.5%.
This has left savers frustrated, and looking elsewhere – even outside tax wrappers – for a way to make their savings work harder.
One increasingly popular option is to hold several thousands of pounds in your current account, to take advantage of generous in-credit interest rates.
Another is to invest in peer-to-peer loans and Debentures, where you won’t have instant access to your cash but you can expect regular interest payments and, in some cases, capital repayments too.
Which leads to the second threat to the cash ISA: the Innovative Finance ISA (IF ISA), which is expected to come onto the market in April 2016.
With peer-to-peer companies including Abundance and our peers – Zopa, Funding Circle, etc. – regularly paying rates well above those currently on offer from cash ISAs (in fact, much closer to the 2007 average than today’s best buys) it isn’t difficult to see why the sector has grown so quickly in recent years.
From just £267m in lending in 2012 to £1.7bn in 2014, that growth could be even bigger in 2016.
However, and important to remember, is that money in an IF ISA will not (under current rules) be covered by the Financial Services Compensation Scheme. This protects your money, up to £85,000 per firm (bank, building society, pension provider, ISA provider, and so on), should that firm fail.
This is no doubt one of the factors, alongside tax efficiency, keeping cash ISA attractive for many.
And yet, from April 2016 these features will no longer be unique to cash ISA (up to a limit) when the Personal Savings Allowance (PSA) comes into play.
From this point, for anyone earning a taxable income of up to £42,700**, the first £1,000 of interest earned from savings will be tax-free. That’s going to ‘abolish tax on savings for 95% of savers,’ according to the Treasury.
Banks and building societies will stop automatically taking 20% income tax from the interest earned on non-ISA savings, which will make the change even easier for savers.
With current accounts paying up to 5% interest and frequently offering attractive linked savings accounts, people may keep their cash here rather than in cash ISA. And with the introduction of the IF ISA – what you could call a halfway house between the safety of cash and the risk of stocks and shares – any spare money, which may take people over the PSA limit, could very well be directed here. The cash ISA really could be in danger.
Part or all of your original capital may be at risk and any return on your loan or investment depends on the success of the project. Investments tend to be long term and may not be readily realisable. Estimated rates of return are variable and estimates are no guarantee of actual return. Consider all risks before investing.
*Correct as of 28/10/2015. Source: moneysavingexpert.com
**The limit differs for higher rate taxpayers. See information sheet here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414026/Savings_factographic_final.pdf