Some 4.3 million cash ISA holders are planning to withdraw their tax-free savings, new research has found.
Of these, a significant 2.86 million are doing so because they feel their ISA rate has fallen too low, they can’t find a competitive ISA to switch to, or they simply believe non ISA accounts are paying more competitive rates.
Indeed, with the top ISA rates falling from around 6.30% a year ago to an average of just 2.05% today, it’s not hard to see why so many savers are looking for more lucrative income streams.
But before you join the ISA exodus and forsake your tax-free savings status, be warned that the grass isn’t always greener on the other side.
All rates are poor, ISAs the least so
No doubt many savers wanting to switch from ISAs will look at fixed rate savings accounts, which tend to be the best paying accounts on the market (regular savings accounts pay higher rates, but of course they don’t allow you to save a lump sum).
According to the Bank of England, fixed rate bonds pay an average rate of 2.35%. This may sound better than the ISA rate if 2.05%, but of course bonds are taxable accounts.
So for a fair comparison, the average ISA is equivalent to 2.55% APR for basic rate tax payers and 3.4% for those in the higher tax bracket, making it a far more attractive offering.
Same applies for top accounts
Of course, the savvy saver has no interest in what the average account pays, so let’s compare the best available cash ISA and fixed rate accounts.
For the ISA option, you can currently get a tax-free rate of 3.75% with the Dunfermline Building Society Fixed Rate Cash ISA (Issue 14).
As for the fixed rate account, ICICI currently pays a rate of 3.90% on its one year bond, which works out to a rate of 3.12% after tax.
So again it’s clear to see that holding your money in an ISA is still the most rewarding way to save for taxpayers - especially those in the higher tax bracket.
Of course for those who aren't taxed, its best to choose the highest paying account overall, which at present is the ICICI offer.
Savers the sacrificial lambs
"There is no getting away from the fact that savers have been the sacrificial lambs of the plummeting base rate,” says uSwitch personal finance analyst Rumina Hassam.
“However, ditching one of the few tax friendly government offerings may not be the best course of action for savers.
“Low rates will not last forever and as soon as the base rate starts to climb again, savings rates will follow suit.
“With some cash ISA savers accumulating ten years of tax-free savings totalling £30,600, competitive returns are crucial."
