Savers plough £3.6bn into money Isas in a month amid allowance minimize fears

Savers ploughed a bumper £3.6billion into cash Isas in February as rumours swirled about possible cuts to the £20,000 annual allowance.

These deposits increased from a previous £3.2billion in January, according to data from the Bank of England.

The appetite for cash Isa saving made up the majority of the £4.3billion overall increase seen across savings accounts from January to February.

The surge in deposits into cash Isas comes partially as a result of speculation that the Government would slash the Isa allowance in the Spring Statement.

Some city bosses lobbied the Chancellor to cut allowances to as little as £4,000 per year in a bid to promote a ‘culture’ of investment.

Isa boom: Savers added £3.6billion into cash Isas during February alone

In the Government’s announcement last week it was revealed that while no changes were made to cash Isa allowances, the Treasury will consider making reforms to ‘get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.’

Laith Khalaf, head of investments analysis at AJ Bell, said: ‘It’s the end of the tax year, so inflows are usually quite chunky, but they have probably been supported by rumours the Chancellor is mulling a cut to the cash Isa allowance.

‘This crystallised in the Spring Statement which said the government is looking at Isa reform… suggesting a cut to the cash Isa allowance will at the very least be on the whiteboard.’

Khalaf added: ‘In the short term those who have been calling for a cut to the cash Isa allowance may well feel like their cunning plan has backfired, as savers continue to pile money into the tax shelter. 

‘The threat of a cut to the allowance is likely to be a spur to action for many, especially given the relentlessly rising tax tide. In the long run, there is considerable doubt that a cut to the cash Isa allowance would deliver a shot in the arm for the UK stock market.’

An AJ Bell survey found that only a fifth of savers would invest more into the UK stock market if the Isa allowance was reduced, with more than half reporting that they would move their money to a savings account.

The inflows also come despite the average cash Isa rate having slipped back to just 1.8 percentage points, from a peak of 3.4 per cent in October 2023.

Khalaf said: ‘If savers don’t shop around they may well be losing out by plumping for an Isa rather than a standard taxable savings account, despite the free ride on tax. 

‘Typical fixed term cash Isa rates have held up better but are still down from their peak. 

‘The typical one-year fixed rate cash Isa is currently offering 4 per cent, down from a peak of 5.5 per cent in October 2023, according to Bank of England data.’

The top deals on offer currently offer a headline rate of 5.38 per cent, but are propped up by temporary three month bonuses. It means the top rate without the bonus is offered by CMC Invest* at 4.85 per cent.

While the best cash Isas are paying strong rates, the average Isa rate has slipped below that of the average instant access savings account, meaning savers will need to keep an eye out for shifting rates.