Savers rush into cash ISAs amid fears of cuts to allowance

Savers paid another £14 billion into cash ISAs in April, according to Bank of England data, the highest amount since the savings products were launched in 1999.

Easy access cash ISAs have been the biggest beneficiaries of this rush, with savers attracted by the high headline rates and the bonus rates on offer. The best cash ISAs are currently returning inflation-busting rates of up to 5.46%.

However, the Bank of England's interest rate cut means rates on savings accounts could soon drop.

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Savers have been grown worried by pronouncements by chancellor Rachel Reeves that she wants to reform ISAs to get more people investing in stocks and shares and less in cash.

This has raised concerns the cash ISA limit could be slashed to as low as £4,000. Currently savers can use all of their £20,000 ISA allowance for cash savings if they wish.

Andrew Wright, head of savings at Paragon Bank, said limiting cash in ISAs in future years “would be a mistake and undermines confidence in one of the UK’s financial services success stories; ISAs have made a tangible difference to people’s savings”.

He added: “Our research suggests that savers wouldn’t direct funds into equities if the ISA cash threshold was cut, but would shift their savings to non-ISA accounts, which is effectively a stealth tax if it means they breach their personal savings allowance.”

Are you unsure which ISA is best for you? A stocks and shares ISA is a good option for long-term savings, but a cash ISA may make good sense in the short term.

Mark Hicks, head of active savings at wealth firm Hargreaves Lansdown, said: “Higher rates and rumbling discussions about the future of the cash ISA pushed tax-saving to the top of the to-do list.

“The level of withdrawals from easy access savings seems to indicate a significant proportion of ISA savings has come from people withdrawing from savings accounts and ploughing the money into their ISA equivalents at either end of the tax year, to take advantage of the tax saving,” he added.

Savers withdrew £11.5 billion from easy access accounts paying interest in April, and £6.3 billion from easy access accounts paying no interest in the same month.

When will savings rates fall?

As competition heated up over tax year end, rates remained elevated, but they have fallen since.

The average rate on new fixed savings accounts rose by 0.07% to 4.02%, and the average easy access account rate fell from 2.01% to 1.99%. That covers everything classed as ‘deposits by individuals’ – so cash ISAs and savings accounts.

“Easy access rates are much more sensitive to base rate cuts, so while fixed terms may not have quite the same headline rate, as easy access deals have gotten less generous and fixed term rates have continued to rise, the gap has been closing,” said Hicks.

Savings rate cuts are likely to slow, and longer fixed terms may well rise, especially if concerns about inflation around the world remain higher and gilt yields stay elevated, he added.

“If inflation is super-sticky, we could see the market become less convinced about rate cuts, which would mean strong savings rates are around for longer.”

The best rates tend to be available from online banks and savings platforms, Hicks pointed out, so it’s worth shopping around and switching to make the most of the deals around.

However he said the level of uncertainty around right now makes forecasting more difficult, “so it’s important to find the right balance between fixed and easy access savings for your own needs – rather than trying to second guess what happens next in the world economy”.