Cash ISA interest rates plummet to new low

New figures have shown that interest rates on Cash ISAs (Individual Savings Accounts) have fallen to new lows.

The research from Moneyfacts, the financial information website, has shown that the average interest rate on a Cash ISA has fallen to 1.74%, plummeting from 2.55% a year ago. The research backs up data from the Bank of England, which showed the average interest rate on Cash ISAs had fallen to 1.85% in December.

The figures also show that savers looking for a Cash ISA have fewer options to choose from, with the number of Cash ISAs available reducing by around 20%. The options for savers have been further restricted with the number of Cash ISAs not accepting a transfer in nearly doubling over the past year.

Funding for Lending Scheme

Both fixed rate Cash ISAs and instant access Cash ISAs have been affected by falling interest rates caused by the government’s Funding for Lending Scheme (FLS), which is designed to reduce interest rates for borrowers and stimulate lending to individuals and small businesses.

The FLS lends money to banks and building societies at just 0.25%, meaning that those who have signed up to the scheme are less reliant on savers for their funding and can therefore pay lower rates of interest on savings accounts, including Cash ISAs.

The interest rates on all best buy savings accounts have fallen significantly over recent months, as even the banks and building societies who have not signed up to the FLS have followed their competitors and reduced the interest rates they pay to savers.

Inflation eroding savings

The average interest rate on Cash ISAs is now well below the current rate of inflation, meaning that savers are seeing their capital being eroded; in December the Consumer Prices Index (CPI) was at 2.7%, nearly 1% above the average interest rate on Cash ISAs.

Cash ISA savers currently only one option, the Coventry Building Society 60 day notice Cash ISA, with an interest rate which beats inflation.

With the FLS set to be around for many months to come and the Bank of England yesterday predicting that inflation is set to rise, the situation looks bleak for savers.

End of the tax year

Many savers leave it until the end of the tax year, on the 5th April, before they make their annual Cash ISA subscription. Anyone who has waited will be disappointed by the current interest rates, especially those opting for a fixed rate Cash ISA, who could have locked into a higher rate had they opened their Cash ISA earlier in the tax year rather than waiting.

Indeed many experts currently believe that savers should not lock money away in long term fixed rates in case they are left in uncompetitive accounts should interest rates rise in the future.

Our team of Independent Financial Advisers in Nottingham are experienced in advising investors on their cash options, if you would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk