Isa rate 'falls to record low' as allowance increases further

The average cash Isa rate on offer has fallen to a record low of 0.82% as the market remains starved of competition for people's savings, according to a website.

The situation has become so bleak that despite the annual Isa allowance having become much more generous in recent years, a saver maxing out their allowance in 2007 could expect to earn more annual interest than someone doing this would today, figures from Moneyfacts show.

A decade ago, the annual cash Isa allowance was only £3,000 - but now savers can put around five times that away in a year, with a maximum allowance of £15,240.

In 2007, the average cash Isa rate was much higher, at 5.06%, whereas now it has slumped to 0.82% - the lowest since Moneyfacts' records started just over a decade ago.

Someone putting away the maximum allowance of £3,000 10 years ago could expect to earn £151.80 in annual interest, based on average Isa rates at that time.

But someone scraping together the maximum allowance of £15,240 today could expect to get just £124.97 in annual interest, based on today's average rates - less interest than they could have earned by putting only £3,000 away in 2007.

The Isa allowance is set to increase again next month to coincide with the new tax year, when it will be £20,000.

Traditionally, this time of year sees a flurry of activity among Isa providers, offering more generous rates to woo savers who have not yet used this year's Isa allowance or are looking for somewhere to put their cash when the new tax year starts in April.

But the low interest rate environment in recent years has been marked by less impressive Isa rates. The introduction of the personal savings allowance, which has taken most people out of paying tax on their savings interest altogether, also means that Isas, with their tax advantages, may not be seen as an attractive an option as they once were.

The personal savings allowance was introduced in April 2016 and it enables basic rate taxpayers to earn up to £1,000 in savings interest tax-free. Higher rate taxpayers can earn up to £500 in tax-free income.

Rachel Springall, a finance expert at Moneyfacts, said seven in 10 (70%) Isas on offer pay less than 1% interest. A year ago, 85% of Isas on the market paid 1% or more.

She said: "Clearly, it's becoming increasingly tough for consumers to take Isas seriously when there are far superior savings rates available on accounts without a tax-free wrapper.

"The personal savings allowance has hit cash Isas hard."

Ms Springall said that if savers see a good Isa deal, they should grab it.

She said: "The Isa allowance is there to use it or lose it, so it's important to go over any old accounts to see whether they need to be transferred to something better, especially as some Isas pay little to nothing in interest."