Savers abandoning cash Isas as terrible rates make tax-free benefit not worth the bother

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The number of savers planning to house their money in a tax-free cash Isa is set to drop by nine per cent this year, research suggests.

A survey by uswitch.com revealed 54 per cent plan to save into a cash Isa during the course of the next tax year - which starts on 6 April - compared to 63 per cent in the present one.

One in ten cite a lack of attractive rates as a deterrent while one in five say they simply cannot afford to save into an Isa this year, according to the comparison website. 

Isa woe: With rates continuing to crumble in the last 12 months a survey has revealed fewer savers will be enticed into tax-free savings next year

Cash Isa rates have continued to crumble in 2014 at a similar pace as last year. Usually, between now and April, providers battle it out for savers’ cash.

However, the best rates have tumbled while choice has also dwindled. The best buy easy-access account from Britannia and Stafford Building Society now comes with just a 1.75 per cent rate.

The top two-year fix is a puny 2.1 per cent from National Counties Building Society. The number of high street banks that feature in the best buy cash Isa tables is minimal. 

The plight of cash Isa rates has been even more apparent in recent weeks as the Post Office axed its best buy Premier Isa while Virgin Money cut the rate for new savers on its Isa.

The average cash Isa rate this year has slipped - down to 1.64 per cent from 1.87 per cent 12 months ago.

Moneyfacts data last month also highlighted the lack of new Isas to house tax-free cash, with just a quarter launching in January compared to the same month in 2013.

Elsewhere, the uswitch data found the average amount people are planning to save into a cash Isa this tax-year has decreased by £121 - down from £3,723 last year, to £3,602.

Less than four in ten are intending to take full advantage of their allowance of £5,760.

Uswitch says it means 23million are currently failing to benefit fully from the tax-free allowance, losing out on £191billion in tax-free savings collectively.

Two thirds of those putting away money into a cash Isa hunt out the best rates in order to maximise their savings, which may include using the independent This is Money cash Isa tables.

More than six in ten have switched at least once to get a better rate. But the research found switching providers has decreased by eight per cent as banks make it harder for savers to move their money between Isas.

Jafar Hassan, personal finance expert at uswitch, says: ‘This Isa season is yet again proving to be a damp squib, with dismal rates unlikely to spark a fire under savers.

‘Unfortunately we haven’t seen the usual battle between banks and building societies to offer the best rates and lure savers, and as we near the end of February far fewer new cash Isa savings accounts have been launched compared to previous years.’

The survey of nearly 2,000 people found 43 per cent now use their current account as their main way of saving.

For instance, Nationwide's Flex Direct Account pays five per cent on in-credit balances for the first year.

Santander’s 123 Current Account offers up to three per cent and also one per cent cashback on household bills paid by direct debit, as savers’ change their habits.

Despite the fall in rates, cash Isas are still popular with savers with a huge £226billion in tax-free accounts.