Cash ISA savers are losing out on £800 million each year, or around £620 each, thanks to misleading “teaser” interest rates, an expert has claimed.
Complex cash ISA terms and sharply falling interest rates cost savers billions each year, according to savings expert Tembo. It estimates cash ISA savers are missing out on £800 million a year as a result of introductory bonus rates, which cause confusion and penalise savers for loyalty.
Tembo claims, that rather than saving into an ISA offering an introductory bonus rate, UK savers could increase their annual interest returns by nearly three times by transferring their cash ISAs to a provider offering a better underlying interest rate.
A cash ISA balance of £20,000 would equate to an additional £620 interest being paid each year.
Tembo said the introductory period is currently used by around 20 cash ISA providers.
This is Money’s Simon Lambert pointed out that Trading 212* pays 5.05 %, including a 0.7 per cent bonus, while until earlier this Plum* paid 5.68 % with a 2.14 % bonus.
He said many savers would have been tempted by Plum’s much higher headline rate, but deals out over 12 months, and Trading 212 is a clear winner.
“This is Money figures, based on a simple average method, show Trading 212 paying a 12-month average rate of 4.52 %, compared to Plum’s 4.08 %.”
Tembo also estimates £4.9billion in interest each year is also lost due to low interest accounts.
While the base rate dropped by 50bps from December 2023 – December 2024, the average interest rate being paid on cash ISAs reduced by almost double that (94bps)* during the same time period.
Tembo said an estimated £50 billion is currently held in accounts where there was an introductory rate that has now come to an end and that only 23% of savers switching accounts each year according to the FCA Cash Savings Review.
Tembo calculates that £38bn of savings put into accounts that featured an introductory rate could now be earning interest on a lower underlying rate.
Based on the current rates offered by the top 10 providers featuring an introductory rate, that’s a loss of £800m each year in interest payments incurred by remaining on products where the bonus rate has lapsed.
Richard Dana, founder and CEO, Tembo said, “Boosting the headline interest rate in the short term in order to attract customers is confusing and unfair. These marketing gimmicks are not widely understood by savers who can lose out on better interest rates if they remain loyal to their savings provider.”
“Bonus or teaser rates are used by companies to attract new customers, in the knowledge that the majority of those customers will not be motivated to move their money in six-12 months time. They also clearly penalise loyal, longstanding customers who end up earning less interest than new customers. It is vital that customers are aware of the impact of these introductory offers so they can make an informed choice.”
