While current cash ISA rates are low, shifting wholesale from these products to chase a higher interest rate is now too short-sighted and a more sophisticated strategy may need to be adopted for savers to make the most of all the accounts currently available.
There is no doubt that the cash ISA is suffering a death of a thousand interest rate cuts, but there is now a lot more to a successful cash savings strategy than there has been in previous years.
It is no longer as simple as looking at the highest rate you can get and putting your money there. Many of you regularly ask us ‘what should I be doing, should I close my ISA now following the introduction of the Personal Savings Allowance and put the money into high interest paying current accounts or other higher paying savings accounts?’ But there is no simple answer.
Interest rates on cash ISAs have fallen significantly from their peak in 2012, when the average best buy easy access cash ISA paid 3.33%. Now, the average rate is just 1.34% - a massive 60% lower in just four years.
Over the same period, the Santander 123 Current Account has paid a static 3% AER on deposits of as much as £20,000 - a rate of interest that has beaten the average cash ISA rate since October 2012.
Since their launch in 1999, if you had used your full cash ISA allowance each year, you could have easily saved nearly £113,000 or more - based on a very conservative estimate of returns equivalent to the Bank of England base rate. Any interest received is paid tax-free plus an ISA (or the value of the ISA pot at death) is now even inherited directly by your spouse, something many people do not realise.
But since the launch of the higher rate current accounts in 2012, it has been tough for many savers to see past these headline rates, to the benefits a cash ISA will offer them over and above interest. This is made even harder following the introduction of the Personal Savings Allowance.
We may now recommend considering a strategy where rather than using one or the other type of account, you could use both to get the maximum benefit available. For example, at present you can put up to £15,240 into a cash ISA, rising to £20,000 from next April. So, we might suggest putting this money into a high interest current account at the earliest opportunity, and then moving that money into an ISA towards the end of the tax year, to protect it from future tax. Then repeat the process the following year.
This way you are getting the best of both worlds, not having to miss out on extra interest or the protection a cash ISA can give. It means a new way of thinking and rather than putting everything into a cash ISA at the earliest opportunity, you may need to be more canny to get the most you can from the various products on offer.
Of course, all of these high interest current account rates are variable and the cash ISA limits and the Personal Savings Allowance are based on a politician’s promise. But by using this strategy, you do not have to worry so much about who you trust more - the banks or the politicians.