There are already signs that the impending Personal Savings Allowance (PSA) may have sounded the death knell for the cash ISA. As we near the start of the official ISA season, when providers used to launch their leading Cash ISA deals, things are already looking bleak. Following last years ISA season, one of the worst we’ve known since ISAs began back in 1999, rates are on the decline rather than beginning to battle for the top spot.
Fixed rate Cash ISAs took a dip back in July 2015 shortly after the announcement that the PSA would come into effect in April 2016 and rates have yet to recover, and now standard fixed rate bond rates are overshooting cash ISA rates. Where as the fixed rate ISAs paid, on average, 0.44% more than fixed rate bonds back in December 2012, today they pay 0.13% less. The question is, when better rates are available on standard accounts, why would savers opt for a cash ISA?
If providers are already losing interest in cash ISA money, savers will shortly follow. If rates don’t improve, savers may not see the point in utilising their cash ISA allowance, even though it is in addition to their Personal Savings Allowance. And where does this leave those with existing cash ISAs, if rates continue to look less appealing?
Currently, basic rate taxpayers in the best easy access account which is from RCI paying 1.55%, will breach the PSA with a deposit of more than £64,516. For higher rate taxpayers it's just £32,258. The current best easy access Cash ISA rate is lower at 1.45%, savers could have amassed £86,280 in Cash ISAs and that’s not even including interest earned. With average interest included this could be closer to or more than £100,000, fully taxfree. So if this money was not ring-fenced in the ISA, the PSA would have been immediately fully utilised.
Although in the short term, while rates are low, opting to use the PSA before using your Cash ISA may be the better option, if and when rates do eventually start to rise, the amount at which savers can save taxfree will diminish, if they are only utilising the PSA. So our suggestion would be to consider both - don't simply dismiss the humber Cash ISA.
If you have any questions on the Personal Savings Allowance and how it may affect you, you can download our free factsheet here.