ISA savings accounts were introduced by the government in the UK in 1999 in an attempt to encourage Britons to start saving. There is a limit to the amount of cash that can be deposited into a cash ISA each fiscal year due to the benefit of tax relief – currently £5,340.
UK interest rates on ISA savings accounts are traditionally quite high, yet there has been a lot of controversy surrounding the interest rates that consumers are actually receiving. The economic downturn has not helped matters, as between October 2008 and March 2010 the average cash ISA savings rates fell from 4.99% to 2.09%.
In March 2011, it was established that 39 of the cash ISAs on the market included an introductory bonus offer advertising some of the best savings rates in the country. This number has increased dramatically compared to previous years, 27 in March 2010 and just 21 in March 2009 .
Is this increasing number of bonus introductory offer fooling consumers into believing that ISA savings accounts have some of the best savings rates, when in fact, these rates only apply for a short term period?
Research has shown that the average cash ISA rate was at a two year high in February and March this year, but is the real interest rate on cash ISAs actually getting worse?
A Consumer Focus super-complaint report (opens as a .pdf) on cash ISAs from 2010 suggests that once the initial bonus period of 12 months is over, the products offers poor value.
For example, at the time of writing the report, Consumer Focus found that the best UK interest rate on a cash ISA (excluding fixed rates) was 3.75% with the Stroud and Swindon Regular Saver Issue 1 ISA. However, after the first year this rate automatically drops to 1.0%. It was also established that only 12% of customers switch their cash ISA providers, suggesting that the majority of Britons are only earning these low (and even lower) interest rates on their savings.
The biggest problem with the introductory offers is that consumers are completely unaware of them, so once the rate drops after the specified period, savers are unknowingly earning a pittance on their savings.
When you receive your annual ISA statement, it is so important that you read it carefully and find out exactly how much you are earning on your savings. If you are unsure of the UK interest rates right now, you should be able to contact your provider and request the information.
Consumer Focus not only believes that British consumers are losing out on a potential £3bn per year because of being unaware of the banks’ bonus offers, but that the reason so few people switch ISA savings accounts is because it is either difficult to switch providers or there is no clarity on the matter.
The watchdog has found that almost 25% of ISA holders have no idea whether they have a bonus interest rate, and 33% don’t know when, or if, it has expired. In addition, over a third of people have held the same ISA for more than five years, implying that they could be earning a lot more interest should they consider switching their ISA.
Chief Executive of Consumer Focus, Mike O’Connor, said: “Unless you check your rates each year you’re likely to end up a poor return on your savings.
He continued: “It is not enough to switch account once and assume your savings are working hard for you.”
If you do have a cash ISA account, it is important that you compare the market regularly to ensure that you are getting the best savings rates. With a significant boost in the number of bonus offers, the ISA you signed up to a few years ago could potentially only be earning you 0.5% to 1.0% per year.
