New research from Moneyfacts has indicated that it may be more sensible financially to invest in fixed bond rates as opposed to ISAs.
The data showed that currently, the highest percentage paid by a five-year bond is 2.5 percent, which compares favourably with the highest ISA percentage payment at 2.15 percent.
Over the course of five years, this could be a potential difference of £383.70 on a £20,000 investment, with the bond investor better off.
The Moneyfacts research also noted that there was a growing gap between the returns on ISAs and those on bonds.
Personal Savings Allowance Tax Break Hits ISAs
Two years ago – and before the personal savings allowance was introduced – it was possible to get an average two-year fixed rate of 1.69 percent on ISAs. Today, however, the figure is lower, reaching 1.08 percent.
Fixed rate bond interest rates have also fallen, but to a smaller degree. In 2015, the figure was 1.8 percent over a two-year period: in 2017, rates of 1.37 percent are available.
Further recent financial research has revealed that fewer UK consumers are choosing to open cash ISAs as a result of the personal savings allowance change, which gives those at the basic rate the chance to earn £1,000 per year in tax-free interest, and those higher rate taxpayers a chance to earn £500.
ISA Investors Not Convinced By Low Interest Rates
Rachel Springall, finance expert for Moneyfacts, noted that the ISA market was “in dire need of a boost in competition” in order to try to increase the number of new investors.
Ms Springall also noted that it would be “hard to convince” savers to invest in cash ISAs while the personal savings allowance remains in place. She also called the deterioration in interest on ISAs “shocking”.
Innovative Finance ISAs Gain Followers
This week hasn’t been all bad news for ISAs however, with HMRC revealing that ‘Innovative Finance’ ISAs (IFIsas) have seen positive take-up, with 2,000 new accounts being opened during the last tax year.
Over £17m was invested in total, with the average new account investment reaching £8,500 during the 16/17 financial year.
A number of vendors have offered IFIsas, including Octopus, Folk2Folk and Kuflink. The IFIsa was first introduced by the government in April 2016 and allows savers to invest their annual ISA investment allowance back into the P2P lending market.
At the same time as announcing the growth in IFIsas, HMRC did note a fall in cash ISA investment, with the amount invested in these accounts falling to £39.2bn in the 16/17 financial year: a big decrease on the £58.7bn invested in the previous year.
Richard Stone, speaking on behalf of the Share Centre, noted his interest in the fact that although ISA performance had fallen, this was predominantly as a result of pure cash ISAs.
ISAs as a whole were first introduced back in April 1999, replacing personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs).
ISAs are tax exempt, and it’s estimated that the cost of the tax relief for the accounts amounted to £2.6bn in the 2015/16 financial year alone.