Are your ISA savings a living dead end?
When bonus rates expire, best-buy accounts can turn nasty, says Samantha Soames.
Friday 15 February 2013
Since they were launched 14 years ago, individual savings accounts have been opened by an estimated 24 million people in the UK, according to the Office for National Statistics. Cash and stock market ISAs now account for £390bn-worth of tax-free savings.
If a saver had used their full cash ISA allowance – the amount each taxpayer can invest per year without paying tax on interest or dividends – in each of those years they would have saved at least £45,000, plus any interest or share price growth.
According to the Office for National Statistics 14 million adults put money into an ISA in the 2011-12 tax year. Many of those will have opened the ISA on the basis of it being a best buy – in that it paid a top rate of interest.
But even last year's best buys may no longer be such great deals, according to Nationwide.
The building society has urged savers to look at the rate or performance of their ISAs before the end of the tax year. It believes many millions of savers are stuck in what it dubbed "zombie ISAs" – savings accounts opened because at the time they topped the best buy charts but which are now earning minimal interest.
Richard Marriott, the head of savings at Nationwide, points out that many savers open new accounts each year on the basis of their place at the top of the best buy chart, but forget to look after their existing ones.
He warns: "There could be zombie ISAs lurking in the drawer that were opened back in the day and forgotten about, so savers should dig them out to see if they can get a better rate for their money. With a little shopping around people could transfer their money into an ISA with a better rate of interest for very little effort."
Justin Modray, the founder of the financial advice website Candid Money, reports that one of last year's best buys, the Santander Direct ISA Issue 8, was paying 2.75 per cent on balances of £20,000 and above.
He says: "This rate has now dropped to 0.5 per cent as the 2.25 per cent bonus has expired."
The Post Office's Cash ISA is a similar offender, offering 2.25 per cent two years ago but now paying just 0.25 per cent interest.
Another account which was once a best buy, the Barclays Cash ISA, pays just 0.1 per cent a year.
Not all ISA providers are letting their customers' cash languish in poorly paying accounts.
Danny Cox at Hargreaves Lansdown points out that NS&I has broken the mould and done "the right thing" by switching all of its ISA customers to its best-rate ISA.
He says: "Hopefully other banks and building societies will be embarrassed into following suit."
From 25 May, NS&I will transfer customers holding its T cash ISA (formerly the Tessa-only ISA) and cash ISA, which both pay 0.5 per cent, into its direct ISA which pays 2.25 per cent.
Jane Platt, NS&I's chief executive, said the decision had been taken on the basis of offering fairness and transparency to all its savers.
At the moment the top-paying ISA is the Barclays bank loyalty reward ISA, paying 2.28 per cent, but this is available – as the name suggests – only to existing Barclays customers.
The NatWest cash ISA, another current best buy, is paying 2 per cent but only on balances of £50,000. If you have between £9,000 and £15,000 the rate is just 0.75 per cent.
Mr Cox warns that ISA savers need to make sure they keep an eye on their savings every year. "While rates will change in the future and while the tax savings may seem slight now, in the future, as your tax-free savings build, they could be considerable."
Craig Donaldson at Metro Bank says ISA providers still need to do more to alert their savers when bonus or introductory rates are due to drop off.
He says: "Savers deserve and should demand transparency and to be dealt with on a level playing field. Consum-ers should be wary of banks that resort to short-term 'bonuses' to exaggerate their headline savings rates, and look for clarity and consistency in their products.
"It's time for banks to end easily misunderstood savings rates, and be straightforward with their customers. We're challenging other providers to develop consistent products that are simple, great value products for savers who want to be able to rely on and trust their bank."
So what should you do if you have a zombie ISA? You could simply transfer the money into a better-paying cash ISA, or think about spreading your ISA allowance between cash and shares accounts.
Although a shares ISA is more risky, as it is subject to stock market highs and lows, those who are able to leave their money put for five years might want to consider one.
Chris Linpow at NFU Mutual says savers need to fill out a form in order to transfer the money across to a new ISA, rather than cashing in the money and opening another account.
He explains: "This way you retain the tax privileges and the amount that can be transferred does not count towards the annual ISA allowance."
Mr Linpow says savers can contact their chosen new provider and fill out a transfer form. Within the form will be a note to the existing ISA provider.
"Your new company should then sort it all out, including moving the money and making sure the tax-free allowance is used," he says.
During the tax year ending 5 April 2013 you can put up to £5,640 into a cash ISA. If you have already used this allowance, you can transfer it into another cash ISA or put some of it into a shares ISA.
Mr Linpow says: "If you've not used your full allowance, £11,280, consider a shares ISA, as you have £5,640 left of your allowance."
You can't, however, move money from a shares ISA into a cash ISA.
If you have money in cash ISAs from previous tax years the tax rules allow you to move this money into a better-paying ISA, but not all providers will let you do this.
The website Savings Champion (www.savingschampion.co.uk) offers a free rate tracker service. It says this monitors all UK-based savings accounts and keeps savers in- formed of any rate changes to their accounts.
It includes information such as any bonuses maturing – and lets savers know where they could switch to.
Susan Hannums, a director of Savings Champion, says: "It's essential savers make a diary note to check the rate on their account each year as a minimum, as rates on many accounts have fallen to an all-time low.
"The base rate may have dropped like a stone in recent years to just 0.5 per cent, but ISA savers can still achieve much better rates of up to 2.5 per cent currently available for an easy access ISA.
She pointed out: "Anyone with £50,000 in an account paying 2.35 per cent gross AER would earn £1,175 per year before tax, whereas it would earn just £50 in an account paying 0.1 per cent gross AER."
Shares ISA looking more attractive
David Towse, 33, lives with his wife Layla and two children in Horley, Surrey. He is transferring ISAs with HSBC and Halifax to one being run by Nutmeg, an online discretionary fund manager which also offers financial planning.
The marketing manager has ISAs which he and his wife are using to save for a deposit to buy a house.
"We've got a stocks and shares one with HBSC with a balance of around £22,000 and a cash ISA with Halifax with a balance of around £24,000.
"I opened the Halifax one a few years back when it was paying around 4 per cent. It's an online-only account and they were heavily promoting it and the rate was good so we went for it.
"A few months ago we decided to review our finances and the rate being offered is now poor at less than 1 per cent.
"So we're switching all our ISA money to be invested in shares. We are aware of the risks of investing in the stock market but are confident the rate we will get back will be better."
Have you got a zombie ISA?
The rates analysts at Savings Champion look at some of the worst offenders of the past few years
In 2005 this offering from the Co-op's online bank was paying cash ISA savers a smile-inducing 7.25 per cent. It's currently paying a paltry 0.5 per cent to current account customers and an even worse 0.31 per cent to non-current account customers.
In March 2007 it launched its first ISA, paying 6.55 per cent. The special rate lasted for only six months, after which the account reverted to a variable rate. It's currently paying 1 per cent.
Halifax ISA direct reward – now ISA saver direct
In March 2011 it was paying 3 per cent. After 12 months this account switched into the ISA saver direct and is paying just 0.5 per cent.
AA internet access ISA issue 3
In April 2012 it was paying 3.5 per cent including a bonus of 3 per cent for 12 months. The bonus has now expired leaving account-holders getting just 0.5 per cent.
Santander direct ISA issue 9
It was paying 3.3 per cent in April 2012 including a bonus of 2.8 per cent for 12 months. It, too, pays just 0.5 per cent now that the bonus has expired.
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