Tax-free Isas pay just 0.1% interest

More than 1m savers are earning just 0.1 per cent interest from cash individual savings accounts (Isas), analysts estimate – underlining the benefit of transferring to higher-paying deals in the run-up to the end of the tax year.

Among the worst-paying cash Isas are accounts from Halifax and C&G (part of the state-backed Lloyds Banking Group), from some building societies, and even from Richard Branson’s Virgin Money – which is shortly to launch into mainstream banking with the stated aim of “making everyone better off”.

C&G pays the lowest Isa rate of 0.05 per cent – equivalent to just £1.80 of interest a year on a balance of £3,600 – and another 40 accounts pay 0.5 per cent or less, according to research by savings analyst Defaqto.

Halifax alone is estimated to have hundreds of thousands of savers in its 0.1 per cent Isa Saver account. Another 0.1 per cent payer, West Bromwich Building Society, the sixth largest mutual, also offers a “Privileged Membership” Isa paying 0.25 per cent – which it says is “designed to reward members for their loyalty”.

As with savings rates generally, returns on many Isas have plunged since the Bank of England base rate dropped to a 0.5 per cent low last spring.

David Black, banking consultant at Defaqto, pointed out that many of the worst payers were launched up to a decade ago, meaning account holders may have been receiving uncompetitive rates for years.

“The message is: be pro-active,” he said. “If you’ve had the same variable-rate Isa for any length of time, you should be looking around for a better deal.”

In spite of the low base rate, the average Isa rate is 1.5 per cent, while the highest-paying accounts offer about 3 per cent. And, in coming weeks, banks and building societies are set to launch variable and one-year fixed-rate Isas paying up to about 3.5 per cent – up to half a percentage point above current best buys.

While these offers will be primarily aimed at savers wanting to use up their tax-free allowances for this year, and the tax year starting on April 6, those with older Isas may be able to take advantage by switching their balances to new deals.

Kevin Mountford, head of savings at Moneysupermarket.com, the comparison service, said that with a rate difference of more than three percentage points between the best and worst Isas, “this year it really is time for savers to review their existing accounts”.

While there are already longer-term fixed-rate Isa deals paying as much as 4.6 per cent for five years, Mountford favours one-year fixed rates.

These short-term fixes should offer more interest than variable rates at the outset, and there is a good chance they won’t be overtaken by variable-rate deals in the coming year, he said. Even if the base rate rises, analysts doubt that providers will fully pass on the increases to existing savers.

In addition, many of the best variable-rate offers are expected to include temporary bonuses which later revert to lower rates.

Most of the providers with 0.1 per cent accounts also have other Isa deals offering 3 per cent or more – 4.25 per cent fixed for three-years, in the case of Halifax. It is often possible to transfer existing balances to these high rates, though banks and societies rarely alert customers to them.

Currently, the top taxable savings accounts offer slightly higher rates than the best Isas. However, the average Isa rate is still double the average instant access equivalent – even ignoring the tax benefit. With the introduction of the 50 per cent top rate of income tax in April, and fears of further tax rises, financial advisers believe Isas will only become more valuable.