Are your ISA savings a living dead end?

When bonus rates expire, best-buy accounts can turn nasty, says Samantha Soames.

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

Smile

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.

ING Direct

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.

 

Independent Partners: Get your free guide on  Where to invest your ISA

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
News
i100
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
PROMOTED VIDEO
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Financial Analyst - Forecasting - Yorkshire

    £300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

    Business Architect - Bristol - £500 per day

    £500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

    Regulatory Reporting-MI-Bank-Cardiff-£300/day

    £200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Day In a Page

    Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

    Hunters protect Russia's rare Amur tiger

    In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
    Transfers: How has your club fared in summer sales?

    How has your club fared in summer sales?

    Who have bagged the bargain buys and who have landed the giant turkeys
    Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

    'I'm a realist; I know how hard this business is'

    Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
    The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

    The best swim shorts for men

    Bag yourself the perfect pair and make a splash this summer
    Has Ukip’s Glastonbury branch really been possessed by the devil?

    Has Ukip’s Glastonbury branch really been possessed by the devil?

    Meet the couple blamed for bringing Lucifer into local politics
    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

    In grandfather's footsteps

    5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
    Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

    Martha Stewart has flying robot

    The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
    Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

    Do women cyclists need 'pootling lanes'?

    Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

    The dining car makes a comeback

    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
    Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

    Gallery rage

    How are institutions tackling the discomfort of overcrowding this summer?
    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

    Eye on the prize

    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
    Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

    Women's rugby

    Tamara Taylor adds fuel to the ire in quest to land World Cup