A case of FOMO seems to have struck Cash ISA savers, as the latest Bank of England data shows a hike to contributions in February, possibly in response to fears of changes to eligibility or investment amounts. Bank data shows the typical variable Cash ISA rate has fallen back to 1.8%, from a peak of 3.4% in October 2023 while standard instant access savings rates are offering a significantly better rate than the average Cash ISA.
Sharing his views on these latest data and some of the conundrums facing cash ISA investors, Laith Khalaf, head of investment analysis at AJ Bell, comments:
“Interest rates have fallen back from their peak but savers are still ploughing billions of pounds into Cash ISAs every month. £3.6 billion flowed into Cash ISAs in February, up from £3.2 billion in January. It’s the end of the tax year, so inflows are usually quite chunky, but they have probably been supported by rumours the chancellor is mulling a cut to the Cash ISA allowance. This crystallised in the Spring Statement which said the government is looking at ISA reform to ‘get the balance right between cash and equities’, suggesting a cut to the Cash ISA allowance will at the very least be on the whiteboard.
“In the short term those who have been calling for a cut to the Cash ISA allowance may well feel like their cunning plan has backfired, as savers continue to pile money into the tax shelter. The threat of a cut to the allowance is likely to be a spur to action for many, especially given the relentlessly rising tax tide. In the long run, there is considerable doubt that a cut to the Cash ISA allowance would deliver a shot in the arm for the UK stock market.
“A recent survey commissioned by AJ Bell found that just one in five savers would invest more in the UK stock market if the Cash ISA allowance was cut. Over half would simply put their money into a taxable savings account. Good news for a chancellor hungry for money, less so for the London Stock Exchange. Encouraging more people to invest for the long term is a laudable and sensible aim, not just to boost the economy but to help people leverage the power of the stock market to meet their long-term financial goals. AJ Bell has laid out proposals which could help do this, including cutting stamp duty on UK shares purchased within an ISA.
“What’s notable about Cash ISA flows is they have remained robust against a backdrop of falling interest rates. The average variable Cash ISA rate has fallen from 3.4% in October 2023 to 1.8% at the end of February, according to Bank of England data. Seeing as the most competitive easy access ISA rates are still offering in excess of 4%, that means savers best be on their toes and shop around when choosing a Cash ISA. Especially seeing as the average variable instant access rate is 2.6%*, so if savers don’t shop around they may well be losing out by plumping for an ISA rather than a standard taxable savings account, despite the free ride on tax. Typical fixed term Cash ISA rates have held up better but are still down from their peak. The typical one year fixed rate Cash ISA is currently offering 4%, down from a peak of 5.5% in October 2023, according to Bank of England data.”
*Including unconditional bonuses.
