There’s a new contagion going around during ISA season. It’s called longevitus. And it’s catching fast.
As it stands, the usual game of cat-and-mouse is taking place as banks continue to snare UK savers seeking the right home for their tax-free cash ISA allowance.
Some banks have declared their rates early, hoping to tempt savers into an early decision. Others have paused, observed their rivals, and tried to usurp them with Promethean intent.
As more reveal their sparkling new ISA products, there is a distinct pattern emerging which differs from the recent past. Few institutions are still banking on a one year plan. The assumption must be that consumers are not thinking this way either.
ISAs: Past & Present
The trend has been – as often seen with credit cards – that bonus rates tempt customers in, who then have little awareness of their expiry or what the subsequent standard rates might be.
The results have been evident: as we’ve noted on a few occasions, the average cash ISA offered little more than 0.5% in 2011.
Not enough savers have grasped this pattern of clandestine behaviour. Not everybody is willing to switch every year to a different provider either. “Aren’t ISAs supposed to be straightforward and transparent products?” we find ourselves asking. “Why should I have to switch all the time?” “Why am I being punished for loyalty to my bank?”
Banks have finally had to respond to growing awareness of this behaviour and the growing possibility that their disregard of loyalty might eventually be reciprocated. Loyalty schemes are now in place to restrict some of the best ISAs to current account holders (Nationwide / Barclays), and savers could be tempted to switch banks if the ISA returns are five or six times better elsewhere.
The squeeze in living standards has forced consumers to think more carefully about savings, which, in turn, has forced banks to think more carefully about the ISA deals they offer for the coming year.
The Market for ISAs
And so, what we have with these new cash ISA deals is less of the spectacular and more of the steady. The ostensible plan is to offer products that have something to offer beyond the traditional 12-month bonus lifespan.
In the case of the Nationwide and Cheshire Building Society, bonus rates have been extended until September 2013 – 18 months from now. The sooner one invests in either of these accounts, the longer they stand to benefit from market-leading rates.
Others, while still sticking to the 12-month bonus, have been considerably more generous with their standard rates. The best exceeds 2%, which is still a fourfold improvement on the paltry average that has blighted savers in the recent past.
Let’s see what many of the best listings offer:
Cheshire Building Society DirectSave Cash ISA:
Bonus: 3.16% [Expires 30/09/2013]. Now 3.35%
Pros: Market-leading. Accessible to new customers. Extended bonus.
Cons: No transfers.
Bonus: 3.10% [Expires 30/09/2013]
Pros: Strong performing. Extended bonus. Transfers.
Cons: Applicants must be a Flexaccount holder.
Barclays Loyalty Saver Cash ISA:
Bonus: 3.05% [12 months]
Pros: Strong bonus and standard rate. Longevity.
Cons: No transfers. Existing customers (or with £500 invested)
Bonus: 3.00% [12 months]
Pros: Competitive bonus and standard rate. Big rates for high deposits.
Cons: Lowest tier a little below the best rates.
Bonus: 2.80% [12 months]
Pros: Competitive bonus and standard rate. Fully accessible.
Cons: Falls slightly below the best rates available.
Missing from this list is the Halifax e-ISA, which competes at 3.00% for 12 months before crashing to 0.25%. As the chart below shows, there’s very little incentive to opt for this now. There are competitors offering on and above 3%, and plenty that exceed its meagre standard offering beyond the 12 month mark. Quite simply, the ‘old order’ is no longer competitive.
The new Santander ISA, meanwhile – a Promethean revelation if ever we saw one – is an evolved version of the old order: a leading rate of 3.30% AER for 12 months before dropping to 0.50%.
Santander loves to make a statement; no better demonstrated than by the release of the groundbreaking 123 current account just days ago. But it remains to be seen whether this will carry the greatest appeal.
It’s a definite improvement on the Halifax, as bonus dependent ISAs go. Consumers with the £2,500 minimum deposit have a market-leading offer for 12 months. Investing the full cash ISA allowance (£5,340) would return a healthy £176.22 in tax-free interest after one year.
But savers would have to switch after 12 months to avoid losing out. As the chart above shows, the returns offered by both the Cheshire and Nationwide ISAs would surpass Santander just one month after the bonus expiry, with the Barclays and Natwest ISAs following two months later, and Principality joining them about seven months into the second year.
More tempting yet, for those who like to know exactly where they stand, is Santander’s 1-year fixed-rate ISA at 3.50%, which sits just above Cheshire’s 18-month fixed-rate ISA (3.46%).
ISAs: A Curable Contagion?
ISAs are still not straightforward. There are still rules, regulations and subterfuge in place. Different ISAs cater for different options. We might have to get used to this now, unfortunately. Those who cannot play the game will continue to subsidise those who can.
There are still incentives for higher deposits. Natwest is prepared to offer 3.50% on deposits over £30,000, making it the strongest instant access product on the market.
As noted above, Santander nudges ahead of the Cheshire’s DirectSave cash ISA at 3.30% (for minimum deposits of £2,500). Not all old habits are dying out at once. And they remain perfectly benign if you are willing to invest heavily and remain mobile.
But what we witness here is a pattern of new ISAs that will still perform in the second year and beyond. Longevity is the new buzzword.
Banks want your money for longer, and with sites like Which4U always out to highlight the better deals when they become available, it’s in their interests to offer a dose of something less sour and more long-lasting.