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Sep 2013

High street cash ISA rates fall by over 50% in last 12 months

So far, 2013 has seen rates on cash ISAs continue to fall. Many savers have seen their interest rates drop to below the level of inflation (currently 2.9%). With savers earning lower interest on their savings than the rate of inflation, many people are at risk of a reduction in the value of their money in real terms.

To get a snapshot of what's happening to cash ISA rates right now, we compared data* on several different ISA providers on the British high street - NatWest, Barclays, HSBC, Lloyds TSB, and Santander - to see how their rates have changed over the last 12 months. All rates below are based on a deposit of the maximum cash ISA allowance for that year - £5,640 in 2011/12 and £5,760 in 2012/2013.

The importance of keeping up with cash ISA rates

The changes over the past 12 months highlight the pitfalls of being lured in by attractive bonus rates. For example, in August 2012 Lloyds TSB offered an instant access cash ISA with a rate of 2.35%. However, this was dependent on a 1.35% 12 month bonus rate, which has now come to an end. Savers who failed to pay attention to this change could now be left with a less attractive rate of 1.00%. This is one of the reasons why it makes sense to always keep an eye on the rate of interest you're receiving on your cash ISA, allowing to you to make the switch to a better rate once any bonus comes to an end (charges may apply for switching ISA providers).

The table below shows the respective interest rates on instant access cash ISAs at the five banks from August 2012 and August 2013*:

BankAugust 2012 (%)August 2013 (%)
Lloyds TSB2.351.00

For those who are happy to tie up capital for a fixed term, offers on fixed rate cash ISAs from the five high street ISA providers have also gone down, with Santander paying 2.40% on its 2 year fixed rate bond in August 2013, compared to 4.00% in August 2012. Fixed rate cash ISAs deals from Lloyds TSB and NatWest in August 2013 were also below the prevailing rate of inflation.

The table below shows the respective interest rates on fixed rate cash ISAs at the five banks from August 2012 and August 2013*:

BankAugust 2012 (%)August 2013 (%)
BarclaysNo Moneyfacts data availableNo Moneyfacts data available
HSBCNo Moneyfacts data availableNo Moneyfacts data available
Lloyds TSB2.702.10

To help you review current instant access cash ISA rates, see our latest ISA deals

See also out current deals for fixed rate cash ISAs

What are the alternatives to fixed rate cash ISAs?

If you are happy tying up capital for a fixed term, as an alternative to traditional cash ISAs you may want to consider a structured deposit plan. This type of account offers the potential for higher returns than those available via fixed-rate cash ISAs. A structured cash ISA is capital-protected but offers the potential for higher returns than a regular cash ISA. The current 2013/14 ISA allowance lets you deposit up to £5,760 per individual in a structured cash ISA (the total ISA allowance for 2013/14 is £11,520).

Structured cash ISAs offer you the potential to earn higher returns than you would with a regular cash ISA. The term of a structured deposit cash ISA is usually similar to that of a fixed-term cash ISA - typically three to six years. As with a fixed-term cash ISA, it's important not to invest more money than you can afford to tie up for that period of time.

Your returns are typically based on stock market performance and are not guaranteed. However, your capital is not at risk and is protected by the FSCS up to a value of £85,000 depending on individual circumstances. This means that if your investment performs well, you'll receive your capital back at the end of the term plus any income you made on the initial deposit. In the event that your investment doesn't perform well you may receive no income or capital growth, but your initial capital will be repaid in full. So, if you may have considered a fixed rate cash ISA in previous years, a structured deposit cash ISA could be something to consider. As with any savings or investment product, it's best to seek independent financial advice if you are unsure as to the best choice for your circumstances.

See some of our latest structured deposit ISA options here.

Tax treatment depends on individual circumstances and may be subject to change in the future. Switching your ISA to another provider may incur a charge.

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.

Structured deposit plans are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.

*Source: Moneyfacts

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