It pays to not let your cash molder in a low-rate ISA

It may take time to research and shop around, but finding the best cash tax-free account for you will reap benefits

Cash rates have seen a much-needed boost as the deadline looms for savers wishing to top up their individual savings accounts (ISAs). Interest rates aren't going to blow you away, but they are finally creeping up and with the end of the tax year just a few weeks away, now is the time to make your move.

New and improved products on the market include a two-year fixed rate paying 3 per cent and a market-leading variable account paying 2.50 per cent, both from Santander. This follows a new Barclays ISA range paying up to 2.30 per cent variable and increased rates from Halifax, now offering a three-year fix at 3 per cent.

Halifax has also announced a "super draw" offering three top prizes of £250,000 in both May and June on top of the 100 prizes of £1,000 and 1,000 prizes of £100 usually offered each month. Hoping to persuade its customers to use up their full 2012-13 cash ISA allowance of £5,640, Halifax will put savers into the free May draw if they have at least £5,000 in one of their savings accounts for the whole of April.

"Rates are lower than last year which could put people off, but it is still well worth taking advantage of your allowance as once your money is within an ISA wrapper it stays tax-free and if rates improve in coming years you can move it," says Claire Francis from comparison site MoneySupermarket.

For the very best returns, however, you can expect a few sticking points. Santander's easy-access ISA, for example, pays 2.50 per cent with a guaranteed bonus of 2 per cent for 12 months, but you must have an opening balance of at least £2,500.

You often have to be an existing customer to get the best buys too; all of HSBC's new ISAs are only open to current account holders and the interest depends on the amount you can save. So, if you have a Premier current account you can open a variable rate ISA paying 2.75 per cent on balances over £15,000, dropping to 2.25 per cent below this. For Advance customers these rates drop to 2.15 per cent and 1.65 per cent respectively, while standard current account holders earn only 1.7 per cent above £15,000 and 1.60 per cent below.

The highest returns usually require you to lock your money away too, but this is a risk if you are not certain that you may need the cash during the entire fixed period.

"Usually, you can get much better rates by locking your money into a fixed-rate account, rather than putting it in one that you can access instantly," says Richard Lloyd, from consumer organisation Which?. "But check if there are penalties for withdrawing your money early and keep an eye on what happens to the interest rate when your deal comes to an end."

The difference in rates is often negligible, so think twice before opting for a long-term fix. Halifax is the best buy with a five-year fix paying 3.10 per cent, but you can still earn 2.80 per cent with Santander and only have to fix for two years, while even the best variable rate is comparable at 2.50 per cent. If you fix for four or five years you could be stuck with a rate that may become extremely uncompetitive.

Cash rates have taken a battering since the Bank of England base rate was slashed to 0.5 per cent four years ago. However, if you had saved the maximum into cash ISAs since they were introduced in 1999, earning interest at base rate each year, you could potentially have amassed as much as £60,000 today.

In reality, few savers put away the entire allowance each year, but a bigger problem is that they fail to move their money when the interest rate falls. In fact, Andy Forbes from First Direct says that according to its research nearly two-thirds (62 per cent) of people have never transferred their ISA. Nearly one in 10 simply didn't know they could do so.

"It's surprising that such a large number of savers have never switched their account and, even more so, that many don't realise they can transfer their balance," says Mr Forbes.

Getting the most out of your ISA involves a bit of effort as few accounts offer a consistently decent return. Temporary bonuses often make up the bulk of decent rates, after which rates plummet, so you need to keep on top of switching. MoneySupermarket looked at the top 10 ISA rates offered in March 2012, many with bonuses due to expire this month. If you had invested the full £5,340 allowance in the Halifax ISA Saver, for example, you would have earned £160 in interest (at 3 per cent) but this included a 12-month bonus rate of 2.75 per cent. If you don't take action and switch to a better deal now, the rate falls to just 0.25 per cent – an incredible 10 times lower than the current leading instant access ISA rate of 2.50 per cent – and you would earn a pathetic £13.35 on your savings over the next year.

If you don't trust yourself to remember to move your money when rates fall, it may be prudent to stick with providers offering more consistent rates, which usually means building societies. The top two most consistent easy-access ISAs over the past three years have been from Harpenden and Leek United, according to Which?. Bucking the trend by keeping things simple, Coventry BS has announced that in the new tax year it will increase the rate on all of its existing variable cash ISAs to 2.5 per cent.

The ISA limit increases to £5,760 as of 6 April and if you're moving money between ISAs you must first check that the new one allows transfers in, as many do not. Never simply withdraw the cash as it will lose its tax-free status. Instead, you need to speak to your new provider who will arrange the transfer for you.

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