Savers' suffering will increase from an imminent extension to the Government's Funding for Lending Scheme after the extent of the damage it has caused to ISAs was revealed this week.
According to financial analysts, Moneyfacts, the number of cash ISAs has dropped by almost a quarter from this time last year (325 compared to 420), while returns on long-term fixed-rate ISAs have fallen by a third over the same period – from 3.58% last year to just 2.41% this week.
The stark impact of the Government’s lending programme was evident throughout the traditional ISA season, when the usual suite of new products and competitive rates failed to materialise.
Savers have fared no better in the new tax year, where the increase in the tax-free personal allowance to £5,760 has been offset by a glut of withdrawals and reductions.
Santander axed its heavily publicised Major ISA to new customers shortly after the tax year began (read more), while the Coventry Building Society withdrew its easy-access Poppy ISA, which had stood resolute at the top of best-buy tables.
The only easy-access ISA account that beats inflation is available through First Direct, but savers will need a cool £40,000 to achieve the top rate of 3.00%.
Chancellor George Osborne announced an extension to the Funding for Lending Scheme in the Budget last month. But the scheme has caused a visible collapse in the savings market.
Welcomed Extension
The Funding for Lending Scheme was established in August 2012, offering banks access to cheap funds as a reward for increased lending to households and businesses.
To date, it is primarily the residential mortgage market that has benefited, though the extension is expected to be tailored to offer more support to small business alongside mortgage applications.
Representatives of lending bodies were quick to praise the new incentives available to small businesses, such as an indirect extension to include lending by non-bank subsidiaries of participating banks.
Banks that support these lenders will now be able to include that lending as eligible for the benefits of the lending scheme.
Stephen Sklaroff, Director General of the Finance and Leasing Association, said that the extension “ought in principle to help the leasing markets.”
Paul Smee, Director General of the Council of Mortgage Lenders, also welcomed the indirect extension.
“This ought to result indirectly in the benefits of the FLS scheme being passed through to non-bank mortgage lenders,” he said.
Avoiding Apathy for Savers
The offshoot for savers is that the access to cheaper funds has reduced the need for banks to attract retail deposits through attractive rates.
As rates and products continue to fall in number, increasing numbers of savers are finding themselves unable to match the rising cost of living.
The pain could be heightened even further if inflation follows predictions to rise over 3% in the summer.
And chief executive of City regulator the Financial Conduct Authority has also signalled an intension to crackdown on temporary bonus rates – one of the new ways in which savers have been able to combat the problem of low returns in recent months (read more).
It’s been noted several times here about the need to avoid apathy, and ISAs are a particular case here because any unused allowance does not carry over from year to year.
Hence, when rates do finally improve, savers will benefit most if they have continued to use their full cash ISA allowance during these depressed periods.
Keith McDonald
Which4U Editor
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