Rise in Isa limits is undermined by falling interest rates

There was a big fanfare a year ago when George Osborne increased the annual Isa allowance to £15,000 – but 12 months on, savers are seeing the return on their money falling.

The number-crunchers at Moneyfacts have calculated that the average Isa rate is now 1.44% – down from 1.57% a year ago – and there is a warning that this needs to be reversed if more savers are to be enticed into new Isas (Nisas).

“The Nisa allowance looked great on paper and was seen as a surefire way to reinvigorate the ailing Isa market and get more people saving,” says Charlotte Nelson, of Moneyfacts.

“However, while many savers are now taking advantage of the new larger limit (which has since been bumped up to £15,240), its launch lacked pizzazz. Indeed, many providers shunned its introduction and even dropped their Isa rates in its wake.

“This reduction was partly due to the fact that the new limit caused many providers at the top of the best buys to become oversubscribed really quickly, leaving them with no other option than to reduce rates or withdraw their products completely.”

Ms Nelson adds that the growing popularity of peer-to-peer could also be a factor in the lack of activity in the Isa market.

“It’s hard to escape the fact that while it’s great that the chancellor is trying to encourage the savings habit by increasing the Isa limit, this has had little to no effect on savers,” she says.

“The government needs to stop papering over the cracks and instead look at the real reason why savers are disengaged, which fundamentally boils down to pitifully low interest rates.”