ISA rates cut back after the hard sell

Think your savings are safe with the Bank of England base rate frozen at 4.5 per cent for the 11th month in a row? Think again.

Those with money sensibly stashed in a tax-free mini cash individual savings account (ISA) have seen rates slashed by up to 0.45 percentage points in the past three months alone, new research shows.

Around the time of the new tax year in April, ISA providers were keen to promote their headline-grabbing rates.

"Back then, we saw well over 30 new or revamped variable-rate ISAs hitting the market," says Rachel Thrussell at financial analyst Moneyfacts. "But we predicted these rates wouldn't last - and this has certainly been the case."

Now that the dust from the frenzy of the new financial year has settled, many providers are reducing the rates available.

Since the beginning of this month, Marks & Spencer Money has lopped off a whole quarter point, while Royal Bank of Scotland has reduced the rates on its mini cash ISAs by up to 0.1 percentage points. Lloyds TSB has also cut its mini cash ISA rates by 0.05 percentage points.

Last month there were even heftier cuts. Barclays and the Woolwich both dropped their rates by up to 0.45 percentage points, while HSBC lowered its rate by up to 0.43 points.

Companies have swung the axe for a mix of reasons. They are seeking to maintain their profit margins and, while the Bank base rate may be static at present, falls are anticipated in long-term interest rates. They also think customers won't make the effort to move elsewhere.

Notwithstanding the cuts, a mini cash ISA is still an essential part of a saver's armoury, says Sue Hannums at independent financial adviser Chase de Vere Wealth Management.

Fail to make the most of this tax-free savings wrapper and you are in effect handing money to the Chancellor's coffers. You can save up to £3,000 a year in a mini cash ISA, and many accounts offer penalty-free access.

With rates falling, savers must check how much they are now earning on their money. "You may find the rate you took back in April has taken a sudden tumble," warns Ms Thrussell.

There are plenty of good deals still available - with some topping 5 per cent.

"Fixed rates have been booming in recent months and Northern Rock has an ISA fixed for one year, until 15 August 2007, paying 5.15 per cent on £500."

Ms Hannums also recommends Bradford & Bingley, which is paying 5 per cent on its internet account on balances of £1,000.