Isa Season:A bumpy road to tax-free saving

Recent years have not only seen interest rates on best buys crash down but also an unprecedented number of interest rate cuts on existing accounts, leavings some savers’ interest reducing from pounds to pence.

The government’s intervention in the midst of the crisis seemed focused on borrowers and businesses to boost the economy at the sacrifice of savers. With quantitative easing and the funding for lending scheme, it has been an extraordinarily tough time for savers, having a negative impact only made worse with inflation running far higher than most savings accounts and well above its target rate of 2 per cent for many years now – until very recently anyway.

The consumer price index, the current official measure, finally fell below the government target of 2 per cent in January and now stands at 1.9 per cent, which in theory should give savers some hope as more accounts will make a real return (after taking account of inflation and tax). At the time of writing there are over 60 cash Isas which currently offer a return that beats or at least matches inflation. Having said this, many of these are longer-term fixed rate Isas which means locking the money in over the term, or they are for locals or existing savers, or have a larger minimum balance requirement in order to earn the highest rates. So not without restriction.

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We say in theory that savers should be happy with lower inflation as this is a bit of a double-edged sword. Although more accounts now make a real return, with inflation seemingly under control, this gives the BoE even less of a reason to increase the bank rate any time soon, not that we really expected anything this year.

But there is no sign of an end to the plight of savers anytime soon. In the recent inflation report, the governor of the BoE, Mark Carney, made it clear that there is unlikely to be a rise in interest rates this year and even when the base rate does start to rise, it is likely to remain low, certainly well below ‘pre-crisis’ levels.

And just to cement that we should not expect a rise this year, monetary policy committee member Ian McCafferty also stated that market expectations that the BoE will start to raise rates in the second quarter of 2015 are “not unreasonable”. So all indications point to spring next year. That said, in his inflation report speech, Mr Carney explained that they will look to several measures including unemployment rates to assess if the economy can withstand an interest rate rise, before it makes the decision. So in truth, we do not know when a rate rise will actually happen; only time will tell. No matter how much guess work the markets put into this, there are still a lot of hurdles to jump over.

However, the low base rate and higher inflation is not the only thing savers have had to endure. Added to this is the lack of competition which was a consequence following the launch of the government’s funding for lending scheme. This gave banks and building societies access to cheap funding, negating the need to pull in savers’ money to fund their borrowing books.