ISA and non-ISA interest rates

dmart7

Apologies if this has been raised before.  Most banks and providers give lower interest rates for ISAs than similar non-ISA products.  The difference is quite small - usually about 0.2%.  But how is this justified?  Effectively, the bank is obtaining an additional profit benefit from the ISA scheme, by charging a premium to individuals who save.  The ISA scheme was not intended to be used in this way, for the bank's benefit rather than the individual.  A supposed tax benefit for individual savers is being creamed off by the banks. Sounds like a scandal to me.  Or have I missed the point?

Dazed_and_C0nfused

Given that most people have to have taxable income of at least £18,251 before they would ever have any tax to actually pay on savings interest the tax benefit of an ISA is somewhat less useful than it once was.

With a few exceptions banks and building societies are there to make profits for their shareholders or members so if you don't like the rates just move your money elsewhere.

dmart7

Don't disagree with most of your comments - even about banks existing to make profits - but the real point of my comment still stands.  Moving money elsewhere misses the point - as far as I can see all providers give lower interest rates for their ISAs than their own non-ISA accounts.  So we cannot avoid this penalty by switching.  A supposed tax benefit for individual savers is being creamed off by the banks and providers.  For example, a one year ISA bond typically pays 1.35%, while one year non-ISA bond from the same bank pays 1.5%.  Is there a good reason for this? 

Dazed_and_C0nfused

Have a read of this

https://www.thisismoney.co.uk/money/experts/article-4313124/Why-cash-Isas-offer-lower-rates-savings.html

dmart7

Thanks for the link - best article I've seen.  However, the comments on that article are even better, especially the first one: "Why don't your experts cut to the chase and spit out the real reason.  All the banks and bldg socs with a nod and a wink to each other have chosen to keep (some of) the tax saving for themselves".  Spot on.

eskbanker

dmart7 said:

Thanks for the link - best article I've seen.  However, the comments on that article are even better, especially the first one: "Why don't your experts cut to the chase and spit out the real reason.  All the banks and bldg socs with a nod and a wink to each other have chosen to keep (some of) the tax saving for themselves".  Spot on.

It's hardly spot on when it clearly isn't true - the financial institutions don't have access to any of the tax saving as such, since they pay out gross interest on both ISA and non-ISA accounts!  Whether some of that interest is subsequently taxed is a matter between the customer and HMRC but the providers don't get any piece of it either way.

However, many on that site will of course be Daily Mail readers, who aren't known for letting inconvenient facts get in the way of some indignant outrage and inaccurate conspiracy theorising....

masonic

In answer to your original question, ISAs are complex products with a lot of additional rules, so many that the "ISA Guidance Notes" document HMRC conveniently compiled for ISA providers exceeded 100 pages. It has now been done away with and replaced with an online version, but the rules have not been simplified. 

So there is a cost associated with offering these products to consumers (additional IT infrastructure, staff training, compliance monitoring, annual reporting, etc) and it seems reasonable the beneficiaries of those products should cover those costs, rather than other savers. This is especially true now that cash ISAs only benefit a small minority of wealthy customers, with the rest having less than a few thousand pounds in savings, which earns them interest tax free in a normal savings account.

Given that bank staff so frequently fail to understand the intricacies of these products, it could be argued that the rates ought to be dropped further so that the money saved could be invested in training staff properly, which would result in far fewer threads being started here.

dmart7

Didn't know I'd find rudeness here, so I shall go away and not darken these doors again.  But just to point out that the banks take a benefit of about 0.2% from the ISA accounts compared to non-ISA accounts.  Whether that is called a tax saving or not misses the point.  On the other hand, I take masonic's point about costs, but am not sure it justifies the difference.  And historically, I don't recall it being this way.

glennevis

Virgin Money do offer the same interest rate for ISA and non-ISA savings (e.g. their two Double Take accounts) so if they can do it why can't other banks?

eskbanker

dmart7 said:

Didn't know I'd find rudeness here, so I shall go away and not darken these doors again.

Top tip: if you want to avoid what you perceive as rudeness, you might wish to consider not making contentious assertions that something like this is a 'scandal', with unnecessarily emotive tabloidy language like banks 'creaming off' a 'supposed tax benefit' (who supposed equality of rates?), or at least if you choose to go down that provocative route then be prepared to have such contentions challenged reasonably robustly!

veryintrigued

dmart7 said:

Didn't know I'd find rudeness here, so I shall go away and not darken these doors again.  But just to point out that the banks take a benefit of about 0.2% from the ISA accounts compared to non-ISA accounts.  Whether that is called a tax saving or not misses the point.  On the other hand, I take masonic's point about costs, but am not sure it justifies the difference.  And historically, I don't recall it being this way.

Unfortunately there really are some busy forumites on here whom are equally rude as they are knowledgeable.

Rather than simply stating facts they seem to find it acceptable to denigrate other posters, and swathes of the population, to the point where well meaning threads frequently descend into this sort of patronising reply.

Brush yourself down and come back soon.