4.3 million savers plan to ditch cash ISA accounts

As the ISA season hits the UK, new research from uSwitch.com reveals that 4.3 million consumers are planning to withdraw their cash ISA savings. Over half of these people have made this decision based purely on falling interest rates, 18% just need the extra money and 4% believe they can get a better deal in a non-ISA savings account. With the average cash ISA balance at £2,200, this mass exodus could leave ISA providers £9.5 billion lighter in the pocket. In fact, the only person that will be quid's in from this move is the tax man who could earn an additional £39 million as these consumers stand to lose at least 20% of their interest in non-ISA accounts.

However, uSwitch.com urges the 11.4 million existing cash ISA customers not to act in haste as cash ISAs still seem to be weathering the rate storm. The average savings rate for some accounts is currently just 0.29% but cash ISAs are still offering an average rate of 2.05%. This is the equivalent of 2.55% APR for a basic rate tax payer and 3.4% APR for those in higher tax bracket. Best buy ISA accounts are paying as much as 4.25% which will reward ISA customers with £153 in interest each year completely tax free - compared to just £8 in the average non-ISA savings account. Again, in order to earn an equivalent amount of interest to that offered by the Abbey Super ISA, a higher rate tax would need to find an account paying an interest rate of 7.1% (£153) and a lower rate tax payer 5.3%. Unfortunately, both options are currently impossible to find.

Currently, only 35% of households in the UK (9.2 million) have any form of ISA, meaning 65% of savers are missing out on crucial interest and tax breaks. uSwitch.com analysis has revealed that if each of the 17 million ISA free homes in the UK opted for the Abbey Super ISA paying 4.25%, they would earn an extra £153 a year tax free on £3,600, totalling £2.6 billion. Yet, even if UK households did not opt for the current Best Buy and went for an average ISA rate of 2.05%, UK ISA free households would still earn a whopping £1.2 billion tax free.

Rumina Hassam, personal finance expert at Switch.com said: "There is no getting away from the fact that savers have been the sacrificial lambs of the plummeting base rate. However, ditching one of the few tax friendly government offerings may not be the best course of action for savers. Low rates will not last forever and as soon as the base rate starts to climb again, savings rates will follow suit. With some cash ISA savers accumulating ten years of tax free savings totalling £30,600, competitive returns are crucial."

Next steps

Consumers that withdraw cash ISA savings cannot change their mind and put it back in, the allowance is only valid the current tax year. For savers that aren't happy with their ISA account it is crucial to shop around and work out the interest payments with and without the 20% or 40% tax payment.