Banks killing off Cash Isas?
newatc
Posts: 845 Forumite
All interest rates are poor but the level of cash isa returns against non-isa rates throughout all providers suggest a concerted effort to discourage savers from using Cash Isas.
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Well I think 'banks killing off' is rather strong and I was going to dispute your statement about savings accounts v ISAs (because I was thinking you might have been meaning current account interest rates v ISAs, where there are mega differences).
But, looking at the headline accounts in MSE's own guides:
Savings accounts (headline accounts from http://www.moneysavingexpert.com/savings/savings-accounts-best-interest)
Easy-access savings: allows withdrawals
Ulster Bank – 1.25%
National Counties BS – 1.12%
Bank of Cyprus UK – 1.11%
Tesco Bank – 1.11%
Fixed savings: must lock cash away
OakNorth Bank – 1.86% for 1 year
Paragon Bank – 2.05% for 2 years
NS&I – 2.2% for 3 years
ISAs (headline accounts from http://www.moneysavingexpert.com/savings/best-cash-isa)
Easy access, withdraw anytime:
Charter Savings 1.06%
Virgin Money 1.05%
Post Office 1.01%
Sainsbury's Bank 1.01%
Fixed ISAs (with access):
Paragon Bank 1.2% fixed for one year
Charter Savings 1.45% fixed for three years
Savings accounts do seem better than ISAs. But whether banks are deliberating 'killing' ISAs is another matter - though they are hardly encouraging their use!
Many current accounts are even better - though those have slightly complicating conditions.0 -
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I accept banks (I'm using banks as a generic term) do not need to attract retail cash but I've never known such disparity.
eg Paragon 1.83% fixed bond 1.2 fixed ISA
Charter 1.51 v 1.16
Although ISA might be a little bit more expensive to operate those percentage differences are massive.
In the past, often ISAs were more rate attractive to attract customers but no longer. There may be one or two that offer better ISA rates today than equiv non-ISA but I haven't seen one. That sounds more than a coincidence to me.0 -
With the Personal Savings Allowance the majority of people in the UK would not benefit from using an ISA anyway.
HMRC estimated that 95% of people would not pay tax on their savings interest due to the PSA (https://www.gov.uk/government/publications/income-tax-personal-savings-allowance/income-tax-personal-savings-allowance).
Not much point in pushing a product that won't benefit 95% of you customers. A large percentage of the remaining 5% would probably not see much benefit from a Cash ISA either (if they are saving/investing wisely).0 -
Few people will benefit from cash ISA at the moment, but you never know when the Government is going to move the goalposts. (unless you can afford to hire politicians to tell you?)
For years I didn't bother putting my equities into a S&S ISA - the cost would have outweighed the expected tax savings as using it for drawdown meant I didn't need to sell enough each year to attract CGT.. Osborne's changes to dividend tax, and x-o now charging nothing to run the ISA, means that with the benefit of hindsight that was a mistake.“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair0 -
This has been the case ever since cash ISAs were launched, even pre-credit-crunch when you could get 5% on easy access. The tax saving has always gone to the banks, not the customer. The customer demands a certain return X in exchange for lending his money to the bank. Whether they receive X directly, or whether the bank gives them X+Y, the Government takes Y and leaves the customer with X, is completely irrelevant to them. All they care about is their return. So the net interest rate is going to be roughly the same regardless of whether it's a taxable savings account or a cash ISA.
Easy access banking is a seller's market with the best buy rates usually being subject to rationing (i.e. the best accounts are loss-leaders and are closed after the bank has filled its target, leaving investors who wanted to buy at that price but can't). As the government is waiving their cut the banks can afford to offer the customer X+Y, but why bother when they can fill their allocation by offering X?
Cash ISAs are only useful as a holding pen for stocks and shares ISAs.
In theory cash ISA and taxable rates should have converged after the government introduced the interest savings allowance (meaning banks pay all interest gross and basic rate taxpayers only pay tax on interest over £1,000). By which I mean, taxable rates should have gone down towards cash ISA rates: nothing has changed for cash ISA savers but most non-ISA savers need less gross interest to persuade them to part with their cash. But as those hoarding large amounts of cash will still pay tax - and will still demand a slightly higher gross rate to compensate - it won't be a total convergence.0 -
In the past, often ISAs were more rate attractive to attract customers but no longer.
I wonder if the increase to the ISA allowance affected this as well? In the past, when you could put in a max of £3k they could afford to offer high loss-leader rates (like a high interest current account or regular saver), but not at £20k.0 -
Malthusian wrote: »This has been the case ever since cash ISAs were launched, even pre-credit-crunch when you could get 5% on easy access. The tax saving has always gone to the banks, not the customer. The customer demands a certain return X in exchange for lending his money to the bank. Whether they receive X directly, or whether the bank gives them X+Y, the Government takes Y and leaves the customer with X, is completely irrelevant to them. All they care about is their return. So the net interest rate is going to be roughly the same regardless of whether it's a taxable savings account or a cash ISA.
Easy access banking is a seller's market with the best buy rates usually being subject to rationing (i.e. the best accounts are loss-leaders and are closed after the bank has filled its target, leaving investors who wanted to buy at that price but can't). As the government is waiving their cut the banks can afford to offer the customer X+Y, but why bother when they can fill their allocation by offering X?
Cash ISAs are only useful as a holding pen for stocks and shares ISAs.
In theory cash ISA and taxable rates should have converged after the government introduced the interest savings allowance (meaning banks pay all interest gross and basic rate taxpayers only pay tax on interest over £1,000). By which I mean, taxable rates should have gone down towards cash ISA rates: nothing has changed for cash ISA savers but most non-ISA savers need less gross interest to persuade them to part with their cash. But as those hoarding large amounts of cash will still pay tax - and will still demand a slightly higher gross rate to compensate - it won't be a total convergence.
The word "always" in the statement I've bolded isn't correct.
Many providers have had a policy of paying identical rates on similar ISA and non-ISA products.
Some have paid more on ISAs, typically around the end of the tax year.
Others gave, as you suggest, taken the urine.
But not all. And not always.0 -
mgarl10024 wrote: »I wonder if the increase to the ISA allowance affected this as well? In the past, when you could put in a max of £3k they could afford to offer high loss-leader rates (like a high interest current account or regular saver), but not at £20k.
Yes, exactly right.
When cash ISAs first came out they had quite decent rates because although customers might accept a lower rate because they didn't have to pay tax, the banks competed with each other to offer tempting-sounding accounts to get the customer through the door.
Offering more than base rate when you only have to pay it on £3k (or maybe on a little more if you allow transfers from your rivals' products -and why not) was not a very expensive practice.
These days high single year contributions are possible and potentially hundreds of thousands of pounds deposit if you allow transfers in (because S&S ISA to cash ISA is allowable too, as well as the products having been generally available for ages to build up a tidy sum. And nobody wants to offer an ISA product that only pays interest on the first part of your deposit.
So with these higher limits, banks have decided that ISAs are not really a loss leader product and they are wiser to offer higher rates on accounts with limits they can easily control - eg regular saver hooking you into their services but only small amounts per month, or eg current accounts again bringing you into their ecosystem where they can control how committed you must be to extract the high rates and hopefully get the chance to cross sell other products.
The base rate is only 0.25%. Yet if banks offer four times that on an ISA people moan and complain. People want ten times base rate or more, otherwise they think they're being screwed. So, people will vote with their feet and can choose between ISA or non ISA, but if someone has a loss leader high rate out there they will find they can fill the offer without much trouble.
When interest rates 'normalise' and people are no longer demanding ten times the base rate, and banks are no longer offering twenty times the base rate on a current account or reg saver, you would expect ISAs to become more attractive again. Not least because people's interest income will burn through their personal savings allowances more easily. But people looking for a home for ISA money will still likely be happy to accept a little less on ISAs which are tax free. For high rate taxpayer the PSA is only £500 for a year which you could use up with only a £10k deposit if prevailing interest rates and inflation were 5%.0 -
mgarl10024 wrote: »I wonder if the increase to the ISA allowance affected this as well? In the past, when you could put in a max of £3k they could afford to offer high loss-leader rates (like a high interest current account or regular saver), but not at £20k.
That's an excellent point that I hadn't considered.0
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