Savvy Money: Isas pay despite rock-bottom rates

We're not talking a fortune, but there's still money to be made from these yearly offerings

It's almost that time when banks and building societies start wheeling out their cash Isa offers. However, with interest rates so low, it may feel that there's not much to get excited about.

As I write, the best cash Isa rates on offer if you want easy access to your money is 1.75 per cent. So what can you do to get a better rate?

Consider notice accounts

If you're building up your savings for an emergency, you'll probably want them in an easy-access account. But you could earn a fraction more interest if you open a cash Isa that requires you to give notice – generally of between 30 and 90 days – before you withdraw your money.

We're not talking a fortune, but, for example, you can get 1.80 per cent "expected profit rate" with the Islamic Bank of Britain if you're happy to give 120 days' notice. Shariah-compliant banks don't pay interest but generate a profit; the minimum you can deposit is £250. If you prefer a building society, the Earl Shilton has a 90-day notice cash Isa that pays 1.8 per cent on balances of £10 or more. You can operate the account by post or in the branch.

Think local

The most-competitive rates currently tend to be with the smaller building societies, but don't assume you can go online and open a "best buy" cash Isa with them.

Research from the website shows that several building societies, including the Vernon, Monthmouthshire, Newbury and Loughborough, restrict their variable rate cash Isa to people living in the local area.

Other building societies, including the Ecology (paying 2 per cent) and Coventry (paying 2.5 per cent on its variable rate Isa Reward) will only accept applications from existing customers.

Opt for a fixed rate

When interest rates on savings are so abysmal, this probably seems like the very worst time to tie up your cash Isa money in a fixed-rate account.

But if you need the interest to live off, it may be worth considering for some of your cash Isa savings (for example, you could transfer some of your cash Isa savings from previous years if they're on a paltry rate).

You won't really gain much by going for a one-year fixed rate, and even two-year cash Isas only pay a fraction over 2 per cent. You can get 3 per cent or more if you opt for a five-year fixed rate, but there are some downsides. The obvious one is that if rates rise and banks and building societies raise rates on cash Isas, you could be locked into an uncompetitive account.

Predicting when the Bank of England will raise interest rates is rarely more scientific than throwing a dart at a board while wearing a blindfold, but there is an expectation rates will rise later this year or early next.

The other disadvantage is that you may be limited to paying in one lump sum or there may be time limits by when you must have paid your money in. So if you can't pay in your full cash Isa allowance when you open it, you could lose the rest of your allowance for that tax year.

If you do decide to open a five-year, fixed-rate cash Isa, see if you can find one that will let you withdraw some of the money without paying a penalty (for example, Leeds building society's five-year, fixed-rate Isa lets you take out 25 per cent without notice or losing any interest

Verdict: Keep an eye on notice accounts and the smaller building societies, and consider fixed-rate accounts to maximise your interest.

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

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