05 09 2016

Cash savings may be at record highs but Natwest's 0.01% ISA sums up savers' misery

Bank of England's August rate cut has seen banks and building societies slash ISA rates to near negligible levels.

Tax-efficient savings levels have never been higher. Savers put in £6,338 on average into Individual Savings Accounts (ISAs) in the 12 months to April 2016; a record high representing a rise of 5% on the previous year.

In total, £80m was put into such tax-free cash or investment accounts by the British public with a headline figure also at a record level, according to the HM Revenue and Customs (HMRC), which superintends the system. The figures are definitely impressive but returns on these savings vehicles is truly pathetic, and worsening by the day.

In near tandem with the HMRC's data on our improving usage of ISAs, especially of the cash kind, came the revelation that Natwest, owned by taxpayer-owned Royal Bank of Scotland, had lowered its already miserly instant access cash ISA rate of 0.25% to a near negligible 0.01%.

That means if you happen to be with Natwest's aforementioned ISA product, and use your full £15,240 allowance for 2016-17, then at the end of the year you would be getting a princely return of £1.52.

Disappointing as Natwest's action might be, the High Street bank cannot be singled out for criticism. In July, well before the Bank of England's decision to cut interest rates, research by IBTimes UK into the cash ISA market predicted at least a decade of misery for cash savers regardless of the service provider.

A subsequent, widely predicted cut of 25 basis points by the Bank of England, which lowered the country's headline interest rate from 0.50% to 0.25%, vindicated our analysis and more. In fact, we assumed a worst case cash ISA rate of 0.50%. As it turns out, a number of players are at a significantly lower 0.01% to 0.25% range for easy-access cash ISAs.

Explaining its ISA rate cut from 0.25% to 0.01%, a spokesperson for RBS said, what I expected her to say – the move was undertaken to pass on the Bank of England's rate cut to mortgage customers, and to keep rates competitive for fixed rate savers.

Expect more High Street banks to come forward with the same arguments over the coming months. Consumer body Which? describes cash ISA returns, including products offered by banks to some of their most loyal customers, as "woeful", while Moneyfacts labels the current lowering of rates as "devastating for savers".

Yet, neither describes it as surprising. Afterall, rewinding the clock all the way back to the 2008 global financial crisis – the clamour for lower interest rates has meant borrowers have always been prioritised over savers.

It has meant that while the allowance for ISAs – introduced to the British public in 1999 – is set to rise to a record £20,000 from April 2017, returns have been the lowest since the inception of the tax efficient savings vehicle.

With expected post-Brexit inflationary pressures set to erode what people can set aside for savings, regional disparities are also glaringly visible in HMRC's data. In the period up to April 2014, on 20% of those living in Northern Ireland had used an ISA product.

But South West of England had half of its population use an ISA while London's take-up of ISAs came in at an unimpressive 36%. Further loss of faith in the product cannot be ruled out.

However, for those keeping the faith, Moneyfacts says the upper end of the interest rate range is between 1.11% (from Nationwide Building Society) to 1.25% (from Melton Mowbray Building Society). So assuming you invest your entire cash ISA allowance of £15,240, it would net you £190 at the latter. That's not an awful lot but still better than £1.52.