Cash Isas amongst hardest hit as savings suffer again after base rate cut

Rates for savers are starting to fall following the 0.5 point cut in base rate to 1.5 per cent earlier this month.

Sainsbury's Bank has passed on the full cut on its Internet Saver, which pays 1.4 per cent after savings tax (1.75 per cent before tax). Marks & Spencer's cash Isa (renamed the Tracker Isa from tomorrow) is down to 2 per cent.

Cash Isas have been badly hit by falling interest rates. You can earn more after tax in a mainstream account where you pay tax than in a tax-free cash Isa.

bank of england

Ravaged: Savings have been battered by the cut to the base rate

Banks and building societies used to keep their best rates for savers putting money into these tax-free accounts. Now we have £162billion stashed away in them  -  and providers are banking on the fact we will dip into our savings in taxable accounts before we touch those where our interest is tax-free.

There are only eight variable cash Isa accounts which pay over 3 per cent and some of those don't accept transfers or are restricted to particular savers.

Egg pays 3.55 per cent and NatWest e-Isa 3.49 per cent, but you cannot transfer any existing cash Isas you have elsewhere into these internet-based accounts.

Under government rules, you can transfer your money from one provider to another. But it is up to the provider to decide whether it is prepared to accept transfers into a particular account.

Tomorrow, Marks & Spencer launches its Advantage Cash Isa, which will pay a combination of a good rate, a low initial amount to open the account  -  £100  -  and will accept transfers from other providers.

It will pay 3.1 per cent tax-free, including a one-point bonus payable until April 21, 2010. You need to check the rate before this date to ensure it is still a good deal once the bonus falls off. The big disadvantage for existing customers in its Cash Isa is that they cannot transfer their money into the new deal.

NATIONAL Savings & Investments (NS&I), the government-owned savings bank, today sliced rates on its variable savings accounts, along with its fixed-rate deals for new customers.

These are the first changes made to its rates after the last two cuts in Bank of England base rate. Its cash Isa pays 1.4 per cent, while the rate on its phone or internet-based Direct Isa is 2.3 per cent, down 1 percentage point. Rates on its Easy Access taxable account starts at just 0.36 per cent after tax (0.45 per cent before tax).

But it's NS&I's fixed-rate deals that have been hit the most. Anyone taking out a one-year guaranteed growth bond today gets 1.88 per cent before tax (2.35 per cent after savings rate tax is deducted). Previously, the rate was 3.36 per cent (4.2 per cent). The three-year version now pays 2.24 per cent (2.8 per cent). Before today, it was 3.2 per cent (4 per cent).

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