Savings rates have fallen dramatically in the last six months since the introduction of the Bank of England’s Funding for Lending Scheme (FLS).
This means that the best rates as we come to the deadline for this year’s tax-free ISA savings are close to the lowest ever. However, they still represent one of the best ways to shelter up to this year’s ISA limit of £5,640 from the taxman.
The Funding for Lending Scheme
The FLS was designed to boost the UK mortgage market as it allows lenders to access cheaper loans from the central bank on condition that they pass these on to individuals and businesses.
This has had a damaging side effect for savers because it negates the need for lenders to attract new deposits, which means they have no motivation to tempt savers to deposit their nest eggs with competitive savings rates.
In the last 12 months ISA rates have dropped from an average of 2.55 per cent to 1.74 per cent.
Last month Sylvia Waycot from Moneyfacts outlined her take on the damage done by the FLS and the reductions in rates and the number of accounts on offer since its introduction in August 2012.
She said: "Moneyfacts research shows the devastating effect that the Funding for Lending Scheme is having on savings.
"Providers, who no longer need savers' money to prop up bank balances, thanks in part to the Funding for Lending Scheme, have started streamlining their accounts. We now have less choice than we had four months ago, the rates are very much poorer and to add insult to injury, the introductory bonus has all but disappeared as banks shy away from attracting desperate savers.”
Looking ahead to this year’s ISA season, Ms Waycot summed up the generally unenthusiastic response seen so far.
“Normally we would expect to see providers trying to grab our attention with headline rates but this year, whilst rates on some accounts have gone up, they have not generally risen by as much as they were recently reduced by.
“Savers are desperate for some good news and the ISA season has always been a pretty reliable time for finding ‘that account you’re really pleased about’. But it may be a lot harder to find this year.
However, although rates are unlikely to set the heart-rate pounding, in the last few weeks there have been a few better deals launched and it is likely there will be a few more in the run up to the deadline for 2013-13 on April 5th.
If you want the ease of being able to access your money as you want or in the case of an emergency, then although they pay slightly less interest than fixed rate ISAs, the convenience of an instant-access cash ISA is an important factor for some savers.
This feature focuses on instant access cash ISAs, but we will also look at the best deals for fixed rate cash ISAs and investment ISAs in the next few days.
We highlight the best of the new arrivals and update our top ten best-buy table, which we will continue to do until the ISA deadline on April 5th.
1 – Coventry BS – This one isn’t strictly instant access as you have to give 60 days’ notice to make withdrawals without penalty. It does give the best rate though, of 2.80 per cent, which includes a bonus of 0.60 per cent for 12 months. No transfers in are allowed.
2 – Santander – Its DIRECT cash ISA pays a rate of 2.50 per cent and includes an introductory bonus of 0.50 per cent for 12 months. Find out full details here. This product accepts transfer-in of existing ISAs.
3 – Tesco – Tesco has recently increased the rate on its Instant Access Cash ISA to 2.30 per cent. The product has a 0.30 per cent bonus attached to it for 12 months. It does not accept transfers-in but unlimited withdrawals can be made with no penalty.
4 – Barclays – Barclays Instant Cash ISA Issue 1 pays 2.30 per cent and includes a 0.80 per cent introductory bonus for 12 months. This rate is only available if you invest at least £30,000. The rate for balances from £1 to £14,999 is 2.10 per cent.
5 – HSBC – HSBC’s Variable Rate Cash ISA starts at 1.75 per cent for balances of £1 and rises to 2.10 per cent on balances above £9,000. The top rate of 2.75 per cent is available for balances of £15,000+. There are no penalties for withdrawals and there is no bonus rate. You have to be a Premier Account holder or the rates are lower. For Advance current account customers, the rates are 2.15 per cent and 1.65 per cent respectively. Standard current account holders will receive 1.7 per cent above £15,000 and 1.6 per cent below.
6 – First Direct – First Direct’s Cash ISA starts off at a low rate of interest, just 0.50 per cent, rises to 1.20 per cent on balances over £5,000, then to 1.70 per cent on balances above £10,000. The rate is 2.20 per cent on balances above £20,000 and rises to 3.0 per cent on balances above £40,000. There are no penalties for withdrawing funds and there is no bonus rate.
7 – Nationwide – Its Web ISA Issue 2 account pays a rate of 2.25 per cent which includes a 1.75 per cent bonus until 31st August 2014. You have to hold a Nationwide card account and the minimum investment is £10,000. Transfers-in are accepted.
8 – RBS – Its e-ISA starts off with a rate of 1.75 per cent, rising to 2.0 per cent on balances of £10,000 or more and goes up to 2.25 per cent on investments above £30,000. Transfers-in are allowed.
9 – NatWest – The details of this product are the same as above.
10 – Halifax – Halifax’s ISA Saver Online offers a rate of 1.95 per cent which includes a bonus rate of 1.70 per cent for the first 12 months.
It has a qualifying account for the Halifax Savers Prize Draw. Three top prizes of £250,000 to be won in May. Hold £5,000 or more in qualifying Halifax and/or Bank of Scotland savings accounts during the whole calendar month before the draw. Registration required.
There are some good current account offers around at the moment. Even when the tax you have to take off is taken into account, they still pay better rates of interest than the easy-access ISAs above.
Whether they are better for you depends on your own individual circumstances. If you have a lot of money to invest then the tax-free cash ISA option may provide you with a better return.
However, if you have up to £6,000 then Lloyds are offering up to four per cent. Santander offer credit interest of one per cent on balances between £1,000 and £2,000, rising to three per cent on balances of £3,000 and over. Halifax offer a £5 monthly reward to anyone who stays in credit for the whole month.
Nationwide’s FlexDirect account pays five per cent on credit balances up to £2,500.
But perhaps the best non-ISA savings offer around at the moment comes from First Direct. You need to hold a current account, but if you do you can take advantage of its Regular Saver account where you can save between £25 and £300 for 12 months attracting six per cent interest. However, you need to keep the funds in there for the whole 12 months.
The last word goes to Sylvia Waycot from Moneyfacts, who said: “It doesn’t look like its going to be a bonanza ISA season this year, so if you see one you like, don’t hang around as a limited market always disappears fast.”
Twitter: My Finances
Join the conversation at #news_myfinances