In a new series, we answer YOUR burning money questions…
I like to use as much of my annual Isa allowance as possible, splitting contributions between cash and investments.
But I feel some cash Isa providers are not playing fair by paying lower interest rates than they offer on identical non-Isa savings accounts.
Is this discrimination a case of providers profiteering at the expense of cash Isa savers? S.C, Canterbury.
Profiteering?: As savings rates have become a little bit more attractive, many cash Isa savers are being left behind and getting a raw deal
Jeff Prestridge replies: This issue is one I have become increasingly aware of as savings rates have been pushed up in response to increases in the Bank of England Base Rate – with another hike expected this Thursday when the Bank’s monetary policy committee meets.
As savings rates have become a little bit more attractive, many cash Isa savers are being left behind and getting a raw deal.
This is happening whether Isa savers are opting for a variable or fixed interest rate deal.
The latest example was when NS&I – the Government savings bank – recently pushed up rates on all its variable rate savings deals.
The increases mean someone with money in its Direct Saver account will now earn 1.2 per cent annual interest while Direct Isa savers will only get 0.9 per cent.
The two accounts are nearly identical in terms of how savers can operate them. So, there is no notice required on withdrawals and no penalties – and the accounts can be managed online or by phone.
And while the 1.2 per cent on offer from Direct Saver is potentially subject to tax, most savers do not have to pay it because of their right to take advantage of a personal savings allowance (more about this shortly).
At Nationwide Building Society, savers in its popular 1 Year Triple Access Online savings account (version 15) receive 1.5 per cent annual interest while those in 1 Year Triple Access Online Isa Issue (14) get 1.35 per cent.
Isolated incidents? No. On Friday, I asked Anna Bowes, co-founder of rate scrutineer Savings Champion, to do some number crunching. Her results were revealing, confirming that rate discrimination against cash Isa savers is widespread.
First, she looked at the best rates available across the board on easy access savings accounts and easy access Isas.
Currently, the highest interest rates (up to 1.71 per cent) are paid on the former, while the best paying easy access cash Isa is offering 1.5 per cent.
Yet more revealing is the interest rate differential on fixed rate bonds – in and outside an Isa offered by the same company.
For example, Close Brothers is paying 2.75 per cent on a one year fixed rate bond – just 2.11 per cent if held inside a cash Isa. On three-year fixed-rate bonds, Cynergy Bank pays 3.15 per cent outside an Isa, 2.1 per cent inside.
The difference is so startling that it is making some savers turn away from cash Isas in favour of standard savings accounts, using their personal savings allowance instead to protect their interest payments from tax.
Currently, basic rate taxpayers are able to earn £1,000 a year in savings interest without paying any tax on it while higher rate taxpayers enjoy a £500 allowance.
Any interest above these amounts is taxed at 20 and 40 per cent respectively – additional rate taxpayers pay 45 per cent on all savings interest unless it is earned inside a cash Isa.
So, for example, a basic rate taxpayer could save just over £66,660 in the Nationwide Triple Access Online account – and not have to pay any tax on the 1.5 per cent interest.
For the one-year fixed-rate bond from Close Brothers paying 2.75 per cent, the equivalent sum is £36,364.
Bowes’ view is that banks and building societies should stop offering Isas that pay ‘substandard’ rates. Yet, providers say lower cash Isa rates are not always the norm.
For example, NS&I says that in the 12 years that Direct Saver and Direct Isa have been on sale, rates on the Isa have been higher in eight of those years.
Meanwhile, Coventry Building Society, which pays higher rates on fixed-rate bonds outside an Isa than inside, says cash Isas are costly to administer – a result of ensuring HM Revenue & Customs rules are adhered to.
This leads to lower interest rates for cash Isa savers.
Some readers accept Coventry’s argument, but believe the reduction in cash Isa savings rates is disproportionate.
I’m in the Bowes camp on this one – and I imagine you are. It’s time for cash Isa savers to be given a fairer deal.