Cash ISAs ‘falling short’ on ensuring best returns

Better returns elsewhere

Cash ISAs are failing to keep up with fixed-rate bonds when it comes to where savers can find the best returns, analysis has found.

The average one-year fixed-rate ISA pays 1.26% in interest - 0.16 percentage points less than the average one-year fixed bond - at 1.42%, according to Moneyfacts.co.uk.

The average five-year fixed ISA pays 1.96% while the equivalent bond pays 2.21%.

Moneyfacts said that while ISAs were once favoured by savers looking to protect their cash from tax, they have now fallen from grace.

It said the personal savings allowance (PSA) which gives savers the chance to earn up to £1,000 in interest tax-free each year outside Isas is taking its toll on the ISA market as savers no longer feel the need to shelter their cash there.

The personal savings allowance was introduced in 2016.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “There has been a distinct lack of competition in the ISA market, both from little movement in interest rates, to very few new providers entering the arena.

“There are 98 fixed-rate bond providers in the market but only 56 fixed-rate ISA providers, so there is a lot less choice out there for savers looking to utilise their annual £20,000 ISA allowance.

“Savers today can earn over 2% on a one-year bond, but there is not a single fixed Isa paying this as an equivalent.

“This means cash ISAs are still falling short.”

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