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ISA: Savers to 'turn their back' on ISAs as rates drop – should you open one in 2021?

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ISA savings can be held in four main types of accounts which includes cash, stocks and shares, innovative finance and Lifetime ISAs. New accounts can be opened as a tax year starts, with the 2021/22 tax year commencing from April 6.

However, as new data was released from the Bank of England, analysis from Paragon Bank revealed savers may not be in such a rush to invest in new accounts.

Derek Sprawling, a savings director at the company, commented on what may be on the horizon: “We are now in March and the end of winter is finally in sight. This week marks an important and long-awaited milestone – the lockdown restrictions have started to lift as part of a phased plan unveiled by the Government last month.

“While we are working to a clear timeline out of lockdown that will accumulate to a tentative return to ‘normality’ in late June, the pathway to economic recovery is a little harder to map out.

“Last month, the Bank of England published its latest Monetary Policy Report, in which it confirmed that the Bank of England Base Rate would be maintained at 0.1 percent. Despite the Base Rate remaining at a historic low, the report set out some optimistic forecasts, with the successful roll-out of the vaccine improving the economic outlook for the UK.

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“However, it also emphasised that the long-term economic picture remains uncertain and is heavily reliant on how the pandemic evolves, and how households, businesses and financial markets respond to any developments, including the lifting of restrictions.”

Derek went on to examine ISAs: “The approach of spring also indicates that a new tax year is less than a month away, which means it is officially the start of the ISA season.

“However, whilst the savings market has boomed during the pandemic and household deposits have reached milestone highs, 2020 saw the Cash ISA market grind to a halt.

“While the household deposits market now stands at £1.49trillion, the non-interest earning market has seen the most explosive growth during the pandemic as people piled excess cash into their current accounts or linked, non-interest bearing accounts. This category grew by an enormous 27 percent between January 2020 and January 2021, whereas non-ISA balances that earned interest increased by 15.2 percent.

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“In contrast to this, ISAs grew by a minuscule 0.7 percent, a seven-fold decrease on the category growth in 2019. Indeed, Bank of England data shows that ISAs have been steadily declining since July. However, at the end of January 2021, the value of the ISA market still stood at £292billion and ISAs remain an important savings vehicle for over 20 million people in the UK.

“Even if we have another subdued year, I expect that over six million people will, rightly, continue to subscribe to a cash ISA.

“This data begs the question – what will 2021’s ISA season look like, and have savers turned their back on cash ISAs? It certainly seems there is a downwards trend, which will be heavily influenced by the current market conditions. However, it’s important for savers not to lose sight of the long-term picture when choosing whether to invest their tax-free allowance by April.

“Any money saved in an ISA is tax-free for years to come – by not using their ISA allowance, savers are missing out on the opportunity to add to their life-long tax free savings.”

On top of this, to open an account a saver must be either resident in the UK or a crown servant.

Savers can open ISAs with a multitude of financial institutions, including:

  • Banks
  • Building societies
  • Credit unions
  • Friendly societies
  • Stock brokers
  • Peer-to-peer lending services
  • Crowdfunding companies
  • Other financial institutions



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