For some time now, banks have penalised loyal savers by loading instant access savings accounts with tempting bonus rates that expire after 12 months and return very little thereafter. Only by chopping and changing every year are savers usually able to benefit by playing the banks at their own game.
A report at the end of last year showed that the average rate on instant access cash ISAs had slumped to a pitiful 0.53%, which has added insult to injury given the irrepressible squeeze on living standards.
A concerted focus on inflation and savings in recent months, however, has brought the incentivised nature of savings accounts to savers’ attentions.
With many savers now aware that they have to switch regularly to gain returns on their savings, the apathy and immobility that banks have exploited is running thin. Banks are now having to consider their rates beyond the first 12 months to remain competitive.
Beyond the First Year
This table demonstrates the performance of today’s top instant access cash ISAs over two years on a single deposit of £5,340.
This chart shows us two things: firstly, that the second year makes a considerable difference; secondly, that most banks are now choosing to offer more.
Nationwide’s market-leading e-ISA long outperforms its competitors at 3.1%, but the expiry of its bonus after 18 months in September 2013 sees the account revert to a standard rate of just 1%. It takes only seven months for the Barclays Loyalty Reward ISA returns to catch the Nationwide and hit the top itself.
Strong standard rates offered by Principality (1.8%) and Natwest (2.0%) enable both ISAs to catch ING Direct in the second year. This is significant for competitiveness because unlike Nationwide and Barclays, Principality does not require savers to be existing customers. It is also domestic based for customers with concerns about investing in overseas banks (see more on the Passport Scheme).
The average standard cash ISA rate reported last year – 0.55% – would show a trajectory somewhere between Halifax’s miserly 0.25% and ING Direct’s 1.00%. These become the lowest two performing ISAs at the end of the second year, which makes it abundantly clear that the top end of the market has evolved beyond the simple cut and sever policy that has exploited savers in recent years.
Forests of Obscurity
Cash ISAs should be relatively straightforward. Without tax, the rate you see is the rate you get. And yet, it’s the assumption that they are so straightforward that has allowed much of the exploitation to take place. With typical astuteness, James Coney has highlighted specific traps designed to catch out unassuming consumers.
Cash ISAs are not out of the woods yet. But banks have, until recently, assumed that consumers couldn’t see the wood for the trees, so to speak.
They’ve been right so far. Perhaps not any more.