With interest rates on everyone's lips, and many people giving up on saving and withdrawing their cash ISA savings, uSwitch explains why you shouldn't ditch your ISA just yet and how to ensure that you are making the most of your savings.
Why are people dropping their cash ISAs?
uSwitch research found that 38% of savers are planning to ditch their tax free cash ISA accounts - almost half of these people said they would be doing so because of low interest rates, while 18% said it was because they needed the extra cash and 4% because they believed they can get a better deal elsewhere.*
With an average cash ISA balance of £2,200, that means that savers will withdraw a total of £9.5 billion and will lose out on £196 million of tax-free interest.
Why should I keep my cash ISA?
While interest rates on cash ISAs have suffered because of recent cuts in the base rate, dropping your cash ISA could prove to be a costly mistake.
The average savings rate for some accounts is currently just 0.29%, while cash ISAs are still offering an average rate of 2.05% - the equivalent of 2.55% APR for a basic rate tax payer and 3.4% APR for those in a higher tax bracket.
Some best buy ISA accounts pay as much as 4.25%, which means savers investing the maximum £3,600 could earn £153 in tax-free interest each year, compared to the £8 they would earn in the average non-ISA savings account.
In fact, to earn equivalent interest to these best buy cash ISAs, savers would need to find an account paying an interest rate of 7.1% for higher tax brackets or 5.3% for lower rate tax payers, and in the current market, these kinds of savings accounts are impossible to find.
What should I do now?
Currently, only 35% of households in the UK have any kind of ISA, meaning millions of people are missing out on earning interest and a much-needed tax break.
If you don't have an ISA already, apply now - if you were to put your full cash ISA allowance into an account paying 4.25%, you would earn an extra £153 a year - tax free.
If you already have a cash ISA, don't ditch it - rates may be low now, but they will pick up in the long term. Why not think about transferring your ISA to an account paying a better rate of interest?
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* Research from Research Now carried out for uSwitch with 2011 consumers on 6th February 2009
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