These Isas are a perk...for banks
Nothing highlights the diminishing competition among our banks more effectively than their treatment of cash Isa savers.
Cash Isas are one of the most popular and valuable ways to save as interest is tax-free. And of all the cash Isas available, among the most popular at the moment, given very low rates, are fixed-rate accounts where money is tied up for one or two years.
But banks are increasingly discriminating against Isa savers by paying lower rates on Isas than on identical fixed-rate accounts that are not Isas.
For instance, last week Halifax was paying 3.3% fixed for two years on its non-Isa Guaranteed Reserve account (not a bad rate).
But its equivalent two-year fixed-rate Isa, with otherwise identical terms, paid 2.85%.
It is an unfair way to behave because it wipes out the tax perk, which is the cash Isa's essential benefit.
Someone who chose the higher rate, and then paid basic-rate tax on the interest, would be only marginally worse off than the Isa saver earning the lesser rate tax-free.
Taking this Halifax example, if you invested the annual cash Isa allowance of £5,100, the benefit of choosing the Isa over the higher-paying but taxable account works out at roughly £20, on total interest of about £300.
So the benefit of choosing to invest in an Isa goes in the main part, it would seem, not to the saver but to Halifax.
That was never the intention behind Isas. If just one institution were doing this it wouldn't much matter. But where all the institutions are up to the same trick, you begin to conclude that competition is failing.
So as part of our report into the state of competition among banks – two years on from the peak of the crisis – we analysed cash Isas, looking in particular at institutions offering fixed rates both with and without Isa status.
At present, a staggering 17 institutions are doing what Halifax is doing – offering lower rates on Isa accounts than on identical non-Isa ones.
These providers offer a total of 28 Isa accounts where a higher rate is available in non-Isa accounts with otherwise equal terms.
The full list of offenders is too long to publish, but it includes building societies (Leeds and National Counties, for instance) as well as established banks (Halifax, Santander, Northern Rock and HSBC) and relative newcomers to the best-buy tables (such as Aldermore and Bank of Cyprus).
If you look harder at the list of offenders, you notice something else. Halifax, Saga, Birmingham Midshires and Lloyds, for instance, all appear.
But they share something else in common – they are all owned by one banking group, the gigantic Lloyds, which swallowed up the former HBOS two years ago to become the biggest bank in the land.
Chelsea Building Society and Yorkshire Building Society are also on the list and, in case you needed reminding, they too are one and the same, because Yorkshire rode to the rescue of the ailing Chelsea in late 2009.
Is it a coincidence these six institutions, owned by just two groups, all resort to similar ploys? I don't think so. Apparently separate organisations that fall within one group would not want to compete with each other, so why wouldn't they all behave in the same way?
Two years ago, almost to the day, Financial Mail warned of the risks of the 'knight on a black horse' – a reference to Lloyds' takeover of HBOS – pointing out that reduced competition would lead to poorer deals for savers and borrowers.
Now we are seeing it. We see it in the fact that mortgage and savings rates are huddling around similar levels, with few truly attractive, outlying deals. And in the matter of Isa rates we are seeing it too, in this increasingly uniform – and unfair – treatment of savers.
On the subject of cash Isas, Deputy Prime Minister Nick Clegg got himself into a twist last week, appearing to confuse tax evasion (which is against the law) with tax avoidance (which is perfectly permissible).
In an interview he implied that by seeking to avoid tax legitimately, people were doing something morally questionable, or failing in their civic duty.
The truth is that there are not very many ways in which ordinary people can avoid tax.
And those few opportunities that do exist – such as Isas, pensions, share-save schemes, the gift-aiding of charitable donations, and so on – don't seem especially immoral.
They seem sensible. Financial Mail has for years helped readers avoid paying tax needlessly and – whatever Nick Clegg says – we will continue to do so.