ISA benefit barely worth the bother for basic rate taxpayers
Andrew Hagger of Moneynet.co.uk looks at the returns that tax free savings currently offer compared with standard savings products.
When you compare the net return from best buy ISA products against best buy taxable savings accounts, you really have to question if it's worth the effort for basic rate taxpayers
On a variable rate ISA the annual interest benefit is a paltry £8.72 (or 73 pence per month!) on £3,600 (£12.34 on £5,100)
A one year fixed rate ISA is a marginally better deal, but it still is only offering just £14.76 more in a year than a non ISA product on £3,600 and £20.91 more on £5,100.
The current low interest rate landscape is really hurting savers with Inflation wiping out the spending power of their cash, and even when you opt for the tax free option that the government encourages us to take advantage of, the returns are still quite pitiful.
Whilst I appreciate that tax free status of your ISA savings is ring fenced and carried forward for future years, at the present time consumers are certainly not going to be falling over themselves for such measly returns on their cash.
The benefit for high rate taxpayers is slightly more worthwhile, but for those not fortunate enough to earn sufficient to qualify for higher rate tax, they are struggling to supplement their income particularly if they are reliant on their savings nest egg.
The Bank of England rate cutting policy may have been the right cause of action to take at the time, but with base rate stuck fast at 0.5% since last March, savers are getting a raw deal all round.
Maybe the inflation surge reported today will mean base rate rising again sooner than we'd thought - and those days can't come soon enough for beleaguered UK savers.
Profit margins squeezed for providers too.
The average variable rate ISA currently pays 1.31% but it's interesting to note that providers have had their profit margins squeezed in order that they can offer a return even at this low level.
Back in January 2008 the average variable ISA paid 5.28% which was 0.22% lower than base rate. In the current market, providers are now paying 0.81% above base rate - effectively cutting their profit margin by more than a full percentage point.