More than 1m individual savings account (Isa) holders could be earning just 0.1 per cent interest, adding to concerns that the increase in the tax-free allowance in the Budget offers only a limited benefit to savers.
Most of the biggest banks and some building societies have cash Isa products paying near-zero interest rates, even on substantial balances, according to Defaqto, a research firm. At an interest rate of 0.1 per cent, the return on £10,000 is £10.
“A lot won’t be aware they are getting such low rates – and there will be quite a few with balances of £50,000,” said David Black, banking consultant at Defaqto.
The rock-bottom returns reflect the fall in interest rates since autumn, he said. The base rate has dropped to 0.5 per cent and on Thursday was held at this low for the second month running.
But the paltry rates also show there is “no real reward for loyalty”, said Black. Savers may have been in these accounts for several years. Meanwhile, new Isa deals are offering rates of up to about 3.5 per cent. Barclays is paying 3.61 per cent on its Golden Isa compared with 0.1 per cent on its Cash Isa. Halifax, which has more Isa customers than any other bank or society, offers up to 3.35 per cent on new accounts while giving 0.1 per cent on its old Isa Saver.
Isa managers tend not to be proactive in telling existing customers of better deals. Black said it is “not in their interests” as it would cost them more for the same amount of cash deposited.
Kevin Mountford, head of savings at Moneysupermarket.com, the comparison service, added that managers worked on the basis that many savers would not move Isas. “These low rates deliver margin in what is predominantly a loss-leading market,” he said.
Savers need to keep track of their rates and be prepared to switch. Black suggested that customers start by calling their provider and asking for a better deal. However, some Isas do not accept transfers in.
Experts also warn that these low-paying accounts stand to offer minimal returns for those taking advantage of the Budget increase in the cash Isa limit to £5,100. At the average Isa rate of 2 per cent, interest on the additional £1,500 that savers will be able to contribute only amounts to £30 a year. On an account paying 0.1 per cent, the extra interest would be just £1.50.
