I like to use as much of my annual Isa allowance as possible, splitting the contributions between cash and investments.
But I feel like some Isa cash providers aren’t playing fair by paying lower interest rates than they offer on identical non-Isa savings accounts.
Is this discrimination a case of profit seeking by providers at the expense of cash Isa savers? SC, Canterbury.
Making a profit?: As savings interest has gotten a bit more attractive, many Isa savers are left with cash and get a rough deal
Jeff Prestridge replies: I have become increasingly aware of this issue, as savings rates have been pushed up in response to the Bank of England’s base rate hikes – with another hike expected this Thursday, when the Bank’s monetary policy committee meets .
Because the savings rate has become a little more attractive, many Isa savers are left in cash and get a rough deal.
This happens whether Isa savers opt for a variable or a fixed interest rate agreement.
The last example was when NS&I – the Rijksspaarbank – recently raised the rates on all its floating-rate savings deals.
The increases mean that someone with money in their Direct Saver account now gets 1.2 percent interest per year, while Direct Isa savers only get 0.9 percent.
The two accounts are nearly identical in terms of how savers can use them. So no notice is required on withdrawals and no penalties – and the accounts can be managed online or over the phone.
And while the 1.2 percent that Direct Saver offers may be taxable, most savers don’t have to pay it because of their entitlement to a personal savings deduction (more on that shortly).
At Nationwide Building Society, savers on their popular 1-year Triple Access Online savings account (version 15) receive 1.5 percent annual interest, while those in 1-year Triple Access Online Isa Issue (14) get 1.35 percent.
Isolated incidents? No. On Friday, I asked Anna Bowes, co-founder of Rate Scrutineer Savings Champion, to do some math. Her results were revealing and confirmed that rate discrimination against Isa savers in cash is widespread.
First, she looked at the best rates available across the board for easy-to-access savings accounts and easy-to-access Isas.
Currently, the highest interest rates (up to 1.71 percent) are paid on the former, while Isa offers the highest paying easily accessible cash at 1.5 percent.
Even more revealing is the interest rate differential on fixed rate bonds – inside and outside an Isa offered by the same company.
For example, Close Brothers pays 2.75 percent on a fixed-rate one-year bond — just 2.11 percent if held in a cash Isa. On three-year fixed-rate bonds, Cynergy Bank pays 3.15 percent outside an Isa, 2.1 percent inside.
The difference is so startling that some savers are turning away from cash Isas in favor of standard savings accounts, instead using their personal savings to protect their interest payments from tax.
Currently, base rate taxpayers can earn £1,000 a year in savings interest without paying tax on it, while higher rate taxpayers enjoy £500 in compensation.
Any interest over these amounts is taxed at 20 and 40 percent, respectively — additional taxpayers pay 45 percent on all savings interest unless earned in a cash Isa.
For example, a base rate taxpayer can save just over £66,660 on the Nationwide Triple Access Online account – and not have to pay tax on the 1.5% interest.
For the Close Brothers one-year fixed rate bond paying 2.75 percent, the equivalent amount is £36,364.
Bowes believes that banks and mortgage banks should stop offering Isa’s that pay ‘subpar’ rates. Still, providers say lower Isa rates aren’t always the norm.
For example, NS&I says that in the 12 years that Direct Saver and Direct Isa have been on offer, the rates on the Isa have been higher in eight of those years.
Meanwhile, Coventry Building Society, which pays higher rates on fixed income bonds outside an Isa than inside, says cash Isa’s are expensive to manage – a result of compliance with HM Revenue & Customs rules.
This leads to lower interest rates for Isa cash savers.
Some readers accept Coventry’s argument, but believe that Isa’s cut in savings rates is disproportionate.
I’m here in the Bowes camp – and I imagine you are too. It’s time Isa savers got a fairer deal in cash.
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