Interest rate drops in Cash ISA's means most now do not beat inflation.

*Please note the information in this article may be out of date

Coventry Building Societies replacement of its 3.10% ISA with a 2.8% package is just one of a long chain of recent rate changes to Cash ISA's. These changes mean that most Cash ISA's no longer beat the rate of inflation.

Thu, 17 Jan 2013

Update on cash Isa rates which accept existing Isa transfers, 13th March 2013.

According to the Bank of England figures as reported in The Guardian, the average Cash ISA figure is 1.85% compared to 2.52% in August. That is quite a significant drop in return. Teachers Building Society, Britannia Building Society, and Coventry Building Society, who had all been topping the tables for the best interest rates on offer for Cash ISA's, have all dropped their rates. The M&S Bank's ISA offering 2.75% is to be pulled on Monday. With the inflation rate running at 2.7%, there are now few Cash ISA's offering anything over that.

There are still rates of 3% available for fixed term Cash ISA's with minimum investment requirements of about £40,000 or £50,000, such as a First Direct ISA. But typically the best rates available to the average saver are about 2.5% to 2.6% at the moment, below the rate of inflation.

The Government's Funding for Lending program is being blamed for the falling ISA rates. The scheme, launched last August, provides banks with cheap funding to encourage lending to individuals. Now that the banks have a source of cheap finance, they no longer feel the need to entice savers onto their saving schemes with attractive interest rates. Banks no longer need to source as much funding directly from savers, when it is being made available at cheap rates by the Government.

The run up to the financial year end in April has traditionally seen competition between the banks to see who will offer the best Cash ISA rate to catch those who are looking to use up their full annual ISA allowance before the year end. Last year during this battle of the banks, rates of between 3% and 4% were being offered by major banks and building societies. It is highly unlikely that we will see anything like those rates on offer this year. Not now that the banks have a source of cheap finance.

The personal tax free savings allowance for Cash ISA's for 2012/13 is £5,640. Up to this amount may be placed in a Cash ISA earning tax free savings, up to the 5th of April. For anyone considering opening a Cash ISA to make use of their allowance it may be worth while to hold off and see if the rates improve any between now and March.

For more information on Cash ISA click here.