Savers look to alternatives as cash ISA rates hit record low

The average interest rate on offer for a cash ISA is now just 1.74%, according to recent research by Moneyfacts. This represents a big drop from rates this time last year, which averaged 2.55%, and the fall is widely believed to be partly due to the fact that financial service providers no longer need to generate as much custom from savers in the wake of the Bank of England's Funding for Lending Scheme. Both instant access ISAs and fixed rate ISAs have been affected by falling rates, despite the fact that the latter usually offer a higher rate of interest.

Bank of England shows cash ISA rate drop

Findings from the Bank of England corroborate this, with the average rate for a cash ISA, including any guaranteed bonus, standing at 1.85% in December 2012. The average rate on offer, excluding bonuses was just 0.88%. To put this into perspective, last August these rates stood at 2.6% and 1.42% respectively.

An alternative to fixed rates

Traditionally, many savers have turned to fixed rate bonds to try and squeeze the most out of their savings. However, the current record lows mean that even the best fixed rates available barely beat instant access rates. As an alternative, many savers are looking at structured deposit plans, which offer the potential for higher rates without risking capital. There's no guarantee of returns, but your initial investment is protected up to the current FSC limit of £85,000. As with any new savings plan, it's a good idea to seek independent financial advice if you're unsure.

To find out more about alternatives to fixed rate cash ISAs, click here.