Cash ISA rates on the rise for the first time in seven years, but still don’t offer the best rates, according to Defaqto

05 March 2018

Cash ISA rates increase for the first time in seven years with a 31% jump on 2017 rates

  • Cash ISA rates increase for the first time in seven years with a 31% jump on 2017 rates[i]
  • Average interest rate offered by a cash ISA is 0.70% compared to just 0.53% a year ago
  • Standard current accounts still offer the best returns for savers
  • Long term savers can benefit from rates of up to 2.25% for a five year term ISA
  • Defaqto urges savers to scrutinise the market to find the best deal

As the end of the current tax year approaches, savers will be relieved to discover that cash ISA rates have begun to rise for the first time in seven years.  Analysis from independent financial information business, Defaqto, reveals that average rates for instant access cash ISAs[ii] have leapt by 31% for balances of £1,000 to £2,500 and 29% for balances of £5,000 to £10,000.

In addition, the number of cash ISAs currently available on the market has also increased by 21%, from 370 products in 2017 to 446 currently, giving savers an even greater choice of account for their hard-earned money. However, a great many of these accounts have some sort of restriction on who can open them, or they are specialist products such as Help to Buy ISAs.

Whilst rates on cash ISAs are on the rise, the same can’t be said for standard current accounts[iii].  Having outperformed cash ISAs in previous years, the average interest rates currently on offer for standard current accounts are significantly lower than those offered in 2017 – up to 32% lower, depending on the amount being saved. Not only that but there are now only a handful of current accounts which pay interest on savings balances.

Nevertheless, for those savers with £2,500 or less, a standard current account provides a competitive alternative to a cash ISA.  Those with £1,000 to £2,500 in a standard current account will benefit from an average interest rate of 1.96%, 280% more than that offered by the average cash ISA.  There are though only 9 current accounts that will pay interest on £1,000 of balance, and just 7 that will pay interest on £2,500.

For those with £10,000 or more, a cash ISA is a marginally more attractive option, offering average returns of up to 15% more than a standard current account, with almost no change in the number of products to choose from compared with 12 months ago.  The number of cash ISAs on the market currently which offer the highest rate of interest on balances over £5,000 is virtually unchanged since 2017.

 

Average Interest Rate (AER)

Amount Saved

Standard Current Account

Instant Access Saving

Instant Access ISA

£1,000

1.96%

0.39%

0.70%

£2,500

1.98%

0.39%

0.70%

£5,000

1.17%

0.40%

0.71%

£10,000

0.62%

0.41%

0.71%

£20,000

0.80%

0.40%

0.72%

 

The bigger focus for those chasing instant access savings will likely be on finding the best rates in the market.  For all amounts saved up to £20,000 current accounts offer the best instant access rates.  Unless savers need the longer term tax protection afforded by Cash ISAs, then their best home for savings would be the Nationwide FlexDirect Account (for savings up to £2,500), the Lloyds Club Lloyds Account or Bank of Scotland Vantage Classic Account (for up to £5,000 saved), and the Santander 123 Current Account (for savings of £5,000 to £20,000).

Highest Interest Rate (AER)

Amount Saved

Standard Current Account

Instant Access Saving

Instant Access ISA

£1,000

5.00%

1.50%

1.21%

£2,500

5.00%

1.50%

1.21%

£5,000

2.00%

1.50%

1.21%

£10,000

1.50%

1.25%

1.21%

£20,000

1.50%

1.25%

1.21%

 

Further Defaqto analysis reveals that better rates overall are reserved for those savers who can leave their money long term without the need to withdraw it.  For example, those with £10,000 who can lock into a cash ISA for five years, could benefit from an interest rate of 2.25% with Charter Savings Bank.  Savers who need to access their savings earlier could also look at a 36 month cash ISA at 1.87% with United Bank, or a 24 month cash ISA at 1.67%, with Charter Savings Bank, or even a 12 month cash ISA at 1.46% also with Charter Savings Bank (min. balance £1,000) - a significant increase on the 1.21% offered by the best instant access cash ISA (from Virgin Money).

Brian Brown, Head of Insight at Defaqto, comments: “Following several years of struggle, the savings market was given a welcome boost in 2017 with the Bank of England’s marginal base rate rise.  We’re now beginning to see the results of this rate rise trickling down into this season’s ISA products and hope that this is a trend which will continue to play out given that savings rates still have some way to go to catch up with inflation, which currently stands at 3% (RPI)[iv]

“Our analysis looked at the various options available, looking at instant access accounts for those savers who need to make cash withdrawals versus long term savings products where money can be locked away for a period of time.  Despite the fact that cash ISAs have seen a boost in their rates for the first time in seven years, we discovered that some savers will be better off opting for a standard current account, particularly if they need frequent or instant access to their money. 

Contact information

Redleaf: Vanessa Chance / Simone Fassom

Phone: 020 3757 6870

defaqto@redleafpr.com

 

Defaqto: Katherine Blackler

Phone: 01844 295 457

pressoffice@defaqto.com



[i] All data taken from Defaqto Matrix database. Product details correct as of 22/02/2018.

[ii] Instant access cash ISAs exclude products which have restricted access, such as certain regions only, require additional accounts, don’t allow instant access without loss of interest, etc.

[iii] Standard current accounts are normal bank accounts, with low or no monthly fees and usually no added non-banking benefits

About Defaqto:

Defaqto is a financial information business, helping financial institutions and consumers make better informed decisions.

Our independent fund and product information helps banks, insurers and fund managers with designing and promoting their propositions. We analyse around 41,000 financial products in the UK. These products change on a daily basis, and our customers need help with keeping track of this.

We have been doing this for over 20 years, and have over 60 analysts spending 400 hours a day monitoring the market. They ensure that the information we provide is accurate and up to date. Our experts have done all the hard work so that financial institutions and consumers can make better informed decisions.

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