New cash individual savings accounts (Isas) with rates approaching 5 per cent are flooding the market, as banks and building societies compete to attract deposits from the over-50s.
New rules raising the Isa allowance from £7,200 to £10,200 for savers aged 50 or over come into effect on October 6. The amount that can be saved as cash will rise from £3,600 to £5,100. First Direct, Abbey and Alliance & Leicester launched higher-rate cash Isas this week and dozens more providers are poised to release their own leading products.
Following the Bank of England’s decision to hold the base rate at its record low of 0.5 per cent this week, the new higher-paying tax-free Isa deals look attractive for savers.
Since the start of the month, leading Isa launches have included Julian Hodge Bank’s 4.15 per cent fixed-rate four-year Isa, Alliance & Leicester’s two-year fixed-rate Isa paying 3.5 per cent and First Direct’s easy access Isa with a rate of 2.96 per cent. The top cash Isa rate is 4.6 per cent from Leeds Building Society, but this requires savers to lock away money for five years. Other deals include Nationwide Building Society’s two-year fixed rate of 3.5 per cent and Cyprus UK’s one-year fixed rate of 3.33 per cent. The highest paying variable Isa rate, of 3.01 per cent, comes from Manchester Building Society.
The change to the Isa limit was announced in April’s Budget. The 21m people in the UK aged 50 or over will benefit from the change next month, while under-50s will have to wait until the start of the next tax year to benefit from the increased allowance.
However experts warn that older savers could find themselves unable to add to their existing Isa if they have already fixed into a deal for this year.
Abbey, which now runs accounts for Alliance & Leicester and Bradford & Bingley, is still working out if people aged over 50 who took out a fixed-rate Isa with A&L or B&B would be able to make top-ups.
“We are doing everything we can but the issue is that these fixed-rate Isas do not allow top-ups so we need to work around this,” said Susan Hannums, media relations manager at Abbey, which this week launched a two-year fixed-rate Isa paying 3.5 per cent.
Moneynet, the financial comparison site said that only a handful of providers had come out and publicly said they were ready for this change and were allowing savers to top up their existing Isas.
“I suspect a lot of the smaller organisations are still working on their plans and some may have not yet managed to change their administrative systems to facilitate the new rules,” said Andrew Hagger at Moneynet.
Banks and building societies have had to spend hundreds of thousands of pounds making the changes to their systems. The Buildings Society Association (BSA) said it welcomed the increase in Isa allowances but said some of its smaller members had had difficulty making the changes in time.
Rachel Le Brocq at the BSA said: “The government’s decision to introduce the change for the over-50s only halfway through a tax year has presented challenges for societies.”
Even those banks that are ready for the rule changes said it had not been easy. John Barker, head of savings at The Co-operative Bank, said: “Making the necessary system and process changes in time for October has required a considerable effort due to the short time available. However, we are now ready and we think it is good news for savers.”
Also, some commentators have pointed out that even for savers who take full advantage of the new rules, the benefit will be fairly limited.
“At the average rate of 3 per cent, the interest on the extra £1,500 that savers will be able to contribute amounts to just £22.50,” said Hagger.
