Record low ISAs

Returns on tax-free savings have fallen to record lows, according to the Bank of England.

The average interest rate for a cash ISA, or Individual Savings Account, dropped to 1.43 per cent in August.

It's the smallest reading since the Bank started calculated this average in 2011.

Returns from notice accounts, including ISAs, are at their lowest since records began in 1999.

Interest rates have been at rockbottom levels for 6 years, but banks and building societies have trimmed them even further in recent months.

Two weeks ago 400,000 savers with National Savings & Investments ISAs were told their rates would be cut from November.

Mortgage borrowers are benefiting from the same trend, with their interest costs also at the lowest level in recent records.

National Savings cuts rate

More than 400,000 National Savings customers will see their interest rates cut from mid-November.

National Savings & Investments will cut the rate on its tax-free ISA account by 0.25% to 1.25%, after finding itself with bumper inflows of cash.

The Direct ISA, with market-leading returns, had been attracting upwards of £800m a year from savers desperate to find a reasonable return, while taking advantage of a 100 per cent government guarantee.

Even more significant was the boost from the highly popular Pensioner Bonds and by the Premium Bond maximum limit going up to £50,000.

Jane Platt, Chief Executive, said it was a "difficult decision" but the institution had to "strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector."

The cut will apply to £3.8 billion of savings from 16th November.

2.5% for lending to Mr Osborne

Interesting that the current ructions in the markets mean that investors can earn 2.5% by lending their money to the government.

That compares to 1.76% for the best easy access savings accounts. One of those is the government's National Savings, ironically.

The best easy access Individual Savings Accounts are about the same.

Accounts where you have to give several months' notice pay 2%.

Tying your money up for 5 years, you can achieve the dizzy heights of a 2.9% return.

So lending to the government by buying what we call Gilts (they're government bonds or IOUs), might be getting more attractive if you've got £1,000 or more to stash away.

Gilts are virtually risk free, because they depend on the solvency of the state EXCEPT for one thing.

You're guaranteed to get the underlying amount of the loan back at the end of the term, but the price can fluctuate along the way - because Gilts like other bonds are traded in the financial markets.

The 2.5% is for 10 year Gilts, though you're not committed for 10 years.

You can buy or sell via brokers or from the Bank of England's Debt Management Office which has lots of other info.

Savings rates cut in half

Interest rates for savers have plummeted since the Bank of England started to channel cheap money to banks and building societies last August through the government's Funding for Lending Scheme.

The point was to cut the price of mortgages and that seems to be working (boosting lending to small businesses has been a bit more of a problem).

But the Bank of England's latest figures show that the average Individual Savings Account (ISA) is paying just 0.69%, half the level of last summer.

The ones with first-year bonuses have dropped to 1.4% from 2.6%.

Normal savings accounts (not tax free ISAs) haven't dropped so much, but they tend to pay lower interest rates anyway.

Banks just don't need to attract your savings. They can get their funds elsewhere.

How low can savings rates go?

Interest rates for five year fixed rate mortgages are at a low of 3.61% at the moment, partly the result of the government's Funding for Lending scheme to make cheap money available to banks and building societies.

But the consequence is that savings rates have continued to suffer.

Instant access accounts pay an average of 0.98% in interest. That's including the annual bonuses some accounts offer.

And tax-free ISAs, excluding bonuses, are giving you just 0.81% a year.

Both of these average rates are plumbing new depths.

These are Bank of England's figures on quoted interest rate. The 5 year fixed rate mortgage number goes back to 1995, when it stood at 9.44%. Remember that!

Mortgage rates dive

The cost of mortgages for many borrowers has hit a new low, the result of a government move to make cheap money available to banks and building societies.

First Direct has launched a five year fixed rate at 2.69% and Chelsea Building Society is offering a fixed rate for two years at 1.89%, the latest in a succession of lenders trying to outdo each other with the cheapest offers.

Both require substantial up front fees and are only available to borrowers who can put up a substantial deposit: First Direct is charging nearly £2,000 and requires the borrower to lay down 35% of the price.

The government's Funding for Lending Scheme is channelling billions of pounds to lenders at very low interest rates. Critics have pointed out that the initiative has largely bypassed first time buyers with small deposits.

Instead, most of the cheap offers are taken up by homeowners re-mortgaging or moving house.

And the Scheme has resulted in a sharp downward lurch in interest rates for savers. The financial information firm, Moneyfacts, said this week that the average interest rate for a new tax-free Individual Savings Account, or ISA, had fallen to 1.74% from 2.55% a year ago.

Bolstered by Funding for Lending, banks don't need to compete for savings to raise funds.

Double the Cash ISA limit

The UK's biggest building society is calling on the Chancellor to allow a huge increase in the amount of tax-free cash that savers can put in Individual Savings Accounts.

There is no tax paid on the interest earned from ISA savings.

In the run-up to the Chancellor's Autumn Statement next month, Nationwide Building Society says the annual cash ISA limit should be doubled to £11,280.

Along with other building societies, Nationwide believes that a big boost to cash ISAs would allow first-time buyers to build up larger deposits - and it would help savers, especially pensioners and those close to retiring, who are worried about paltry returns on their savings.

Currently, you can save £5,640 a year in a tax-free cash ISA, but you can put aside twice that -- the full £11,280 -- in a stocks and shares ISA.

Nationwide said it is renewing it's call for equal treatment of cash savings, because many people prefer the security and flexibility of standard savings accounts to the unpredictability of stockmarket investments.

More info on Cash ISAs.

Absurd Cash ISA bonuses

Advertising for Cash ISAs gets ever more ridiculous.

Excitement is being whipped up because the end of the tax year is looming this week, so it's your last chance to use one year's tax-free allowance and first chance to take advantage of the next allowance.

You see some juicy rates, then realise that most of the interest is in the form of a bonus which will disappear after a year.

AA is paying 3.5%, but 3% of that is a first-year bonus, Santander offers 3.3% of which 2.85 is a bonus and Cheshire is trying to tempt savers with another thumping 3.5% - but 2.5% is a bonus which is later removed.

So the underlying rates are: AA just 0.5%, Santander a mere 0.45%, Cheshire only 1%.

The whole ISA race is like an episode of the obstacle show, "Total Wipeout".

You have to negotiate the bonus rate hurdle, check if they'll only deal over the phone or the internet, winkle out whether the minimum deposit is £1 or a hefty £2,500 and ask if you can transfer money from an old ISA to the new provider.

Congratulations if you get to the end of the course without feeling battered and bruised!

Only the most careful savers, with time to spare every year to do the research and move their money, have a hope of making a decent return

Some ISA providers offer a simpler product. M&S quotes 3% with no bonus booby-trap and Virgin Money's rate is 2.85%, again unsullied by bonus shenanigans and asking for a minimum deposit of just £1.

Surely if the intention of the tax break is to promote long term saving, then we should have more long-term, reliable interest rates - not an annual scramble in which a lot of people end up losing out?

The system we have results in the average interest rate on an up-and-running Cash ISA languishing at a truly terrible 0.65%. That's not my calculation: it's from the Bank of England.

You can compare rates by looking at comparison sites such as Moneyfacts, Moneysupermarket, and Moneynet.

Whopping cost of cards

Credit card interest rates continue to ride at their highest level for nine years.

Latest figures from the Bank of England show that the average rate we paid on credit card borrowings was 16.72% over April and May, the steepest since February 2002.

Looking further back, the previous peak was 23% in 1995.

Meanwhile, on the other side of the ledger, savers continue to suffer.

Banks are paying an average interest rate on Cash ISAs of 0.55%.

Osborne's No-Budge Budget

The Chancellor isn't expected to budge on cuts or raising tax, save for some tinkering round the edges and a rethink on fuel duty.

In fact today's news that inflation is rising even faster, now reaching 4.4% (or 5.5% on the RPI measure), limits Osborne's room for manoeuvre because any retreat from his hard stance might add to pressure on the the Bank of England to raise interest rates.


Fuel duty.
Due to go up by inflation plus a penny, the fuel duty escalator.
Will he forget about the 1p, or forgo the whole increase, or postpone it, staggering the hike over the rest of the year?

Duty on booze.
Will Osborne bottle on the other duty escalator?
A rise of inflation + 2% is pencilled in, which might mean 3p on a pint, or even more once suppliers add their mark-up.
One populist measure could be to forgo some of the increase.
He is likely to announce a lower rate of duty for weak beers and a higher rate for strong beers.

Lots on pensions.
More detail expected on a £140 flat-rate pension, planned for 2015.
Reaction to Hutton Report on public sector pensions.
Possible mention of giving pension savers early access to their money.

Junior ISA
At new tax-free savings scheme has been promised for the autumn. More information is expected.

Unifying Income Tax and National Insurance
Let's face it, this would be terrible news for pensioners if it was done crudely, because there's no National Insurance on pensions.
The Office for Tax Simplification said it might be a good idea, so expect a study.
The OTS also wanted a review of inheritance tax.

Air Passenger Duty
There have been rumours of a freeze, to soften the impact of fuel surcharges on holidaymakers.
And maybe there'll be an update on per flight duty to replace Air Passenger Duty (promised in the coalition agreement).

Crackdown on cheap CDs
He could close the VAT loophole for CDs, DVDs costing under £18 from the Channel Islands. Costs £130m a year.

There are lots of changes already happening in April. The ones he'll wanted to re-mention are:

*Personal allowance rising to £7,475 from £6,475, to £10,000 in 2015-16
*Corporation tax cut to 27% from 28%, small profits rate to 20% from 21%
*£50,000 annual limit on pension contributions.
*5% stamp duty for £1m homes

He might want to gloss over:

*National Insurance going up
*Benefits and tax credits only increased by CPI
*40% tax threshold lowered

Forget about ISAs - pay off the mortgage

Look at your interest rates, think about bankers' bonuses...and weep.

I'll get to the nitty gritty about Individual Savings Accounts in a bit but, first, the big picture.

The average interest rate earned on a tax free Cash ISA at the moment is a mere 0.43%, according to the Bank of England. Compare that to the average rate paid by UK homeowners for a tracker mortgage: 3.54%.

The difference is a whopping 3.11%. This is the amount that is creamed off by banks at our expense, to bolster their balance sheets after the banking crisis.

So consider the predicament of the retired couple dependent on savings interest to bolster a modest pension income. The couple is having to dip into savings to pay household bills because the interest is so meagre.

They are doing without, the bank is counting the profit and the bank's bosses are taking multi-million pound bonuses from the proceeds.

The 3.11% margin compares to 3.23% a year ago, 3.34% in 2009, but just 0.92% at the same point in 2008.

Now look at the latest rates being touted for Cash ISAs. If you believe the press we are being wooed with irresistible deals in advance of the the deadline for 2010-11 ISAs at the beginning of April.

AA offers 3.5%, Santander 3.3%, Barclays 3.25% and Nationwide 3.1%.

Lop off the temporary bonus included in the rate and that translates to: AA 1.85%, Santander 0.5% (!!), Barclays 2.25% and Nationwide 1.75%.

For those of you with spare cash and no debts to pay off, the mortgage especially, these rates might give pause for thought. If you are going to salt money away, you might as well do it in an account where no tax is charged on the interest.

But the rest of us have to compare ISA returns with the cost of our mortgages. As I mentioned, we are paying 3.54% on average for a tracker. The typical Standard Variable Rate mortgage costs 4.02% and the typical 5-year Fixed Rate costs 5.17%.

It is no surprise then that families have been using any spare savings to pay off their debts. Better to use your money to reduce a 4%-or-so interest burden than clock up a 0.43% gain.

The pay-off-your-mortgage strategy makes even more sense now that we face a rise in the Bank of England's base rate. We don't know precisely when it will happen, but most forecasters expect a move this year.

The increase, when it comes, will be a shock for millions of homeowners with variable rate mortgages.

There is a sub-class of borrowers who are on astonishingly low mortgage rates from before the financial crisis and others who are locked into fixed rate deals where no repayments are allowed.

But the rest should be very wary of banks bearing gifts in the shape of Cash ISAs.