Cash ISA Interest Rates 2021
After the Bank of England cut UK interest rates following on from the 2008 financial crisis, they have remained at extremely low levels ever since.
The European credit crisis, huge public borrowing and more recently Brexit and COVID-19 have all put pressure on central banks to keep interest rates close to zero.
Indeed, the amount of global debt issuance by investment grade companies paying negative interest rate hit just over 17 trillion USD recently – a new record - although perhaps not one to shout from the rooftops about!
So what kind of returns can I expect on cash ISAs going forward?
The chart below from the BOE gives you a good visual aid on current cash return prospects.
"Looking at this graph
if you are looking to invest for the longer term you have to question the logic of putting money into a standard cash ISA".
Oliver Roylance-Smith, Head of investment & savings.
UK savers who keep money in long term savings accounts or Cash ISAs where returns are historically lower on fixed rate products will be doing very well to keep their money's buying power ahead of inflation.
"Are you one of the 8.5 million adults that subscribed more than £44 billion into Cash ISAs in the last tax year, or maybe you’re part of the £268 billion currently held in Cash ISAs?
Either way, its possible that you are receiving record low returns, with market leading interest rates only offering around 1.0% to 1.10% AER on 3 to 5 year fixed rate ISAs at the moment. So are there any other options to consider?"
Needless to say, investors are left scratching their heads in how to earn any meaningful yield on their money.
3. Alternative Options To Consider
1. Cash ISA Deposit Plan
If you’re prepared to forego a fixed return, Investec Bank’s popular Kick Out Deposit Plan, offers the same capital protection as any other bank deposit, but will pay 2.25% for each year (not compounded), provided the FTSE 100 Index at the end of each year from year 3 onwards, is higher than its value at the start of the plan (subject to averaging).
That’s a potential 6.75% after 3 years, 9.0% after 4 years, 11.25% after 5 years, etc.
Since the plan is also available as a Cash ISA, and accepts ISA transfers, if you’re thinking what else is there that could release greater potential from your cash, this is an option.
The downside is that the return is not guaranteed, so you could receive only your initial capital back.
More information »
2. Active Savings
Lets face it the best fixed cash ISA rates are not as competitive as the best non cash fixed ISA rates.
One of the challenges with cash is that rates are changing all the time and you need to be proactive in moving money when rates fall.
If you are looking for better returns on your cash (money held outside an ISA) & keeping your money in an ISA is less important than earning a top UK interest rate then...
The good news is that there is a new service offered by Hargreaves Lansdown called "Active Savings" where you no longer have the hassle of opening, closing and transferring your savings between different banks and building societies.
Once your account is open, you can pick and mix savings products from a range of banks and building societies, without ever having to fill in another form.
There are a range of products and terms to choose from, and you can have as many as you like.
With Active Savings there are a host of measures in place to help protect your cash. From Financial Services Compensation Scheme protection, to online encryption technology.
More information »
3. Stocks and Shares ISAs
If you are undecided on whether to go for a cash or stocks and shares ISA a key consideration is interest rates.
"Right now interest rates
are about as low as they can get!"
With cash ISA provider instant access and fixed rate products offering sub 1% rates at the time of writing the challenge over time is that the buying power of your money will deteriorate due to inflation. As at July 2020 the Retail Price Index figure was measured at 1.6%.
The average 1 year fixed rate as at September 2020 was 0.44% (Source: Bank of England).
In real terms the average account holder in a 1 year fixed rate bond is losing money in real terms.
If you want to tackle inflation and you are happy to lock your money away for 5 plus years then you should seriously consider a stocks and shares ISA.
Cash ISA Interest Rates
The interest rates of a cash ISA determine the amount of interest that can be gained from the ISA's deposit. An interest rate is a percentage multiplier under which a gain is made on a certain amount of deposit. Cash ISA interest rates are either variable or fixed and that is dependent on the type of account.
Variable interest rates
In variable interest rates, the rate is not pre-determined and does not remain fixed throughout a set term. Usually, the bank or credit institution depending on certain factors such as the Bank of England Base Rate , determines the rate. The rate can therefore either be high or low at any given time. ISAs that have variable interest rates often include easy access and flexible ISAs.
Fixed interest rates
The exact opposite of variable interest rates, fixed interest rates are pre-determined and do not change over time. Regardless of circumstances in the wider economy or other scenarios that could affect interest on a deposit, the rate remains at it set standard. ISAs with fixed interest rates include regular savings and fixed rate ISAs. Fixed rate cash isas can vary in term length with typical options ranging from 1 to 5 years.
Benefits of variable interest rate accounts over fixed interest rate accounts
Variable interest rate accounts allow for much greater flexibility in terms of deposit and withdrawal. An individual can usually make as many deposits as possible (see the ISA provider terms and conditions) up until the amount becomes equal to that set as the allowance limit. There is also a greater flexibility in withdrawal with little or no penalties or even a set limit on withdrawal. Withdrawals can also be made without meeting any requirements or conditions on the account, unlike fixed interest rate accounts where an individual must wait until the account matures. Always check the small print before you commit to a particular isa product.
Benefits of fixed interest rate accounts over variable interest rate accounts
You know where you stand with a fixed rate isa. Depending on whether the account is a regular savings or fixed rate, the individual gets to deposit a set amount of money at set intervals or a sum of money at once. With fixed interest rates you can usually get a better deal than on a variable interest rate basis. The downside is your money is locked away for a fixed term.
Always ensure that you check with the bank or credit institution their terms and conditions before signing up for an account. Similarly, check whether there are any conditions in transferring to avoid future inconvenience when move your account in future.