If you pay into a cash Isa this year you will lose money.
This sorry state of affairs, whereby even the best rates fall behind inflation, needs to be mentioned.
But if you are going to save, a cash Isa is still worth having.
Cash Isas have had a miserable few years but if you are going to save it is still worth having one
It’s been a miserable few years for the poor old cash Isa.
Whereas the end of the tax year used to mean excitement, as banks and building societies battled it out over rates, instead it’s been gloom – with just a few half-hearted efforts to nudge things up a bit.
I dug through the This is Money archives before writing this and the last year of any decent effort on cash Isa rates was 2013.
A pincer movement on the poor cash Isa arrived over the past two years, as savers shunned them for standard accounts with their shiny new savings allowance.
It means savers can earn £1,000 of interest tax-free, although that’s cut to just £500 if they are higher rate taxpayers.
This annual allowance is a good thing and at current rates you would need a big savings pot to breach it – about £74,000 for a basic rate taxpayer and £37,000 for a higher rate taxpayer, based on the current best buy easy access rate of 1.35 per cent.
But it doesn’t mean the cash Isa is dead.
Dig into the archives and you’ll find that there was once a real battle to raise rates for savers – even after the base rate was cut to 0.5%. In 2012, AA hiked its rate by 0.45% to attract savers
You might not have a savings pot big enough to go over the limit now, but one day you may do.
And as rates eventually rise (which hopefully they will) the pot needed to bust the savings allowance will shrink.
If savings rates get back to 2.5 per cent, interest on a £40,000 saving pot would hit the savings allowance for a basic rate taxpayer, while that on a £20,000 pot would do it for those paying 40 per cent tax.
Would a Jeremy Corbyn-led government keep the £500 tax-free savings perk for higher rate taxpayers?
That’s still a lot of money but not unfeasible, and the size of many people’s cash savings pots never ceases to surprise me.
You also need to question how safe that savings allowance is.
I could see the £1,000 limit for basic rate taxpayers sticking around under a Jeremy Corbyn government, but what about the £500 perk for higher rate taxpayers.
Chancellor John McDonnell might look at that as one for the chopping block, but I couldn’t see him tearing up the whole Isa system
Furthermore, there’s been a bit of good news for Isa savers this year – rates are on the rise.
Things were still better back in the day, but for the first time in years we are seeing some interest in battling it out over better rates.
The top easy access deal is Shawbrook’s 1.25 per cent offer, Nationwide has single access rates at 1.3 per cent and 1.4 per cent, and savers might be tempted by the 1.67 per cent two-year fixes offered by Paragon and Charter Savings Bank.
I’d personally be reluctant to fix for longer, as base rate is forecast to rise and the tap is switched off on the cheap money from Funding for Lending and the Term Funding Scheme that meant banks didn’t want yours.
You may also want to consider investing any money that isn’t a rainy day fund, or needed short-term – savings that you are considering locking away in a five-year fix might qualify for that.
Hopefully, there will be a final flurry of competition on rates and we will keep you updated on the best deals all the way through to 6 April and beyond.
In the meantime, read Lee Boyce’s Five of the best cash Isas – our round-up that we’ve been regularly updating with the best deals for years.
What you need to know about Isas
It’s not long before the door slams shut on your chance to use this year’s Isa allowance.
So, listen to our special Isa podcast – with a comfortable (almost) three weeks to spare before the 5 April tax year-end.
We tackle the basics and have tips for those who are experienced Isa savers or investors.
We also look at why investing is the best way to get inflation-beating returns over the long-term, how savers can eke some precious extra interest from accounts, and why an Isa is worth having.
THIS IS MONEY’S FIVE OF THE BEST CASH ISA DEALS