Cash ISA Providers Stealing My Tax Free Income

dejjones

I'm sure this is not a new topic, but it is currently very pertinent, with interest rates so low.

How do the banks and building societies get away with consistently offering lower interest rates for ISAs than for non ISA accounts?

There is virtually no difference in the net income from either sort of account, which means the benefit of my ISA goes to the provider, not me.

I am surprised that this has not been the subject of one of Martin's campaigns.

Dazed_and_confused

At the end of the day they are businesses so can offer whatever they want.

With the 0% tax rates now available you can have upto £20,500 taxable income in a year before any tax is actually payable so for some people Cash ISA's are not as useful a product as they once were.

Linton

It's a free market. Banks will pay the least interest required to attract customers - why should they pay more? So the interest on ISAs need only be sufficient to provide returns marginally above the net return on non ISA deposits.

colsten

Nobody is stealing any money from cash ISA holders. If you feel different, however, the answer is simple: don't have a cash ISA.

No campaign from anyone would make the ISA providers to up their rates. They set their rates based on their strategies for the prevailing market conditions.

masonic

ISAs are complex products with more requirements and paperwork needed than a standard savings account.

In addition, the majority of savers can't derive any benefit from using cash ISAs as they are basic rate taxpayers who don't have tens of thousands of pounds earning interest and therefore don't pay any tax on their interest outside of a cash ISA.

If cash ISAs did pay the same rates as the equivalent standard savings account at the same bank it would essentially represent a cross-subsidisation of the most wealthy customers by everyone else.

dejjones

I think we should look at the history.

Once upon a time you could get higher rates for ISAs than non ISA accounts so many people invested up to their maximum allowance.

Then when interest rates fell people were encouraged to hang on to their ISAs because they could never get back the tax free status; all would be well when rates went back up, they were told.

So because of the 10 years of hanging on, the banks have been able to reduce their ISA rates until there is now no point in having a cash ISA, but there are millions of investors locked in with inferior rates.

So as I said at the start the only winners are the banks.

SonOf

ISAs have a number of issues.

1 - Historically, they had low contribution amounts (less of an issue today)
2 - They require extra administration in reporting to HMRC
3 - Flexible ISAs have increased administration costs.
4 - ISAs tend to attract smaller values
5 - The ISA transfer system needs to be paid for

msallen

Why don't you start a petition? It looks like you'll get at least one signature.

colsten

dejjones wrote: »

..... there are millions of investors locked in with inferior rates.

Nobody is locked in. People can remove their money from their cash ISAs whenever they like. Whether they do it or not is a separate issue, and entirely down to themselves.

For some people it makes perfect sense to have savings in cash ISAs, perhaps alongside their S&S ISAs. I don't know about you but I prefer to pay no tax on the interest from my 1.5% ISA rather than 40% tax on the interest from my 1.5% Marcus account.

masonic

dejjones wrote: »

I think we should look at the history.

Once upon a time you could get higher rates for ISAs than non ISA accounts so many people invested up to their maximum allowance.

Let's put that to the test:
ISA season 2006
Top cash ISA pays 5.00% (Halifax Direct ISA)
Top instant access saver pays 5.15% (ICICI HiSave)
Top 1 year fixed cash ISA - no data
Top 1 year fixed saver - no data

ISA season 2007
Top cash ISA pays 5.71% (KRBS Direct ISA)
Top instant access saver pays 5.8% (A&L Directsaver)
Top 1 year fixed cash ISA - no data
Top 1 year fixed saver pays 5.95% (Birmingham Midshire)

ISA season 2008
Top cash ISA pays 6.1% (Icesave Easy Access ISA)
Top instant access saver pays 6.5% (Kaupthing Edge)
Top 1 year fixed cash ISA - no data
Top 1 year fixed saver pays 7% (ICICI)

ISA season 2009
Top cash ISA pays 3.51% (Natwest e-ISA, requires another Natwest account)
Top instant access saver pays 3.46% (Ulster bank) *A single example of the ISA being of a slightly higher rate, rates were plummeting at this time so it could be an anomaly *
Top 1 year fixed cash ISA pays 3%/3.2% (Lloyds over £9k/under £9k)
Top 1 year fixed saver pays 3.9% (ICICI)

ISA season 2010
Top instant access cash ISA pays 2.75% (Nationwide e-ISA, requires current account)
Top instant access saver pays 2.92% (West Bromwich BS)
Top 1 year fixed cash ISA pays 3% (Cheshire BS)
Top 1 year fixed saver pays 3.31% (West Bromwich BS)

...just over 9 and a half years later... approximately "10 years of hanging on"

Top cash ISA pays 1.31% (Cynergy bank )
Top instant access saver pays 1.41% (Shawbrook bank)
Top 1 year fixed cash ISA pays 1.41% (Charter Savings)
Top 1 year fixed saver pays 1.65% (Ford Money)

While I couldn't find info on fixed rate ISAs going back as far, the trend for fixed rates in 2009-2010 and the trend for instant access in 2006-2010 looks very similar to the trend today, so perhaps you are mistaking an overall drop in rates since 2008 for a drop in ISA rates specifically. It seems to me ISA rates a few tenths of a percent behind standard savings rates is very much the norm historically.

Then when interest rates fell people were encouraged to hang on to their ISAs because they could never get back the tax free status; all would be well when rates went back up, they were told.

Not here they weren't. When the Personal Savings Allowance was introduced in 2016, people were encouraged to look beyond ISAs to other cash savings accounts. Until then cash ISAs were still worth having for basic rate taxpayers because they still competed with other savings accounts net of tax.

So because of the 10 years of hanging on, the banks have been able to reduce their ISA rates until there is now no point in having a cash ISA, but there are millions of investors locked in with inferior rates.

As above, rates fell on all savings products in line with a drop in the BoE base rate. Banks don't really need all of this money on deposit because they have other cheap means of borrowing.

Anyway, I'm glad that after 10 years of hanging on you've realised the ISA wrapper is not useful to you. Looking on the bright side, you'll be able to earn a little bit more interest in the future armed with this knowledge

TBC15

Dazed_and_confused wrote: »

At the end of the day they are businesses so can offer whatever they want.

With the 0% tax rates now available you can have upto £20,500 taxable income in a year before any tax is actually payable so for some people Cash ISA's are not as useful a product as they once were.

For the sake of the hard of thinking (myself included) how is this made up?