Sit back and watch your ISA nest egg grow
if you have money to squirrel away, why not set up a tax-free cash ISA? Rob Griffin looks at the best deals on offer on the high street
Saturday 26 March 2011
A nyone looking for a cash ISA is certainly spoilt for choice these days. There are currently 300 accounts to choose from and more are being launched on a daily basis as the countdown continues towards the end of another tax year.
The good news is the rates offered are the highest they've been for two years with the best on the market currently paying five per cent. When you consider the Bank of England's base rate is still at 0.5 per cent this represents excellent value for savers.
However, not every ISA is so lucrative. There are plenty of accounts from prominent banks and building societies with rates below one per cent, while the very lowest are parting with a meagre 0.01 per cent, according to data compiled for us by Moneyfacts.
Michelle Slade, spokesperson for Moneyfacts, says the vast difference between the best and worst ISA accounts illustrates the importance of continually shopping around for the best deals rather than staying blindly loyal to one provider.
"ISA rates currently range from 0.01 per cent to five per cent which, on an annual allowance of £5,100, could be the difference between earning 51p per annum in interest and £361," she points out.
While no one can deny the benefits of cash ISAs there's little point in taking out a product on the back of its tax-efficient qualities if the provider is paying virtually nothing in the way of interest, so how can you find the best deals?
Although the sums involved may seem fairly low if relatively small amounts are invested, it's worth highlighting the potential difference for investors with larger sums tucked away in their ISAs, adds Ms Slade.
"If you had invested the full ISA allowance (including Tessa monies) each year, then including interest you could now have around £70,000 invested," she says. "On such significant sums of money even a small increase in interest rate can make a big difference to the amount of interest you will receive."
Analysing the market
There are currently 300 cash ISAs on the market, according to Moneyfacts, so you need to do your research before committing your money. Of those available, 155 are variable-rate ISAs, 139 are fixed-rate ISAs and six are regular savings ISAs.
As we have already mentioned, the rates on offer vary enormously between providers but don't base your decision on that alone. There are a number of other factors that you should also be taking into consideration.
The first is the length of time you are willing to tie up your money. The best rates are usually reserved for those who agree to lock away their cash for up to five years, so you need to be realistic about your likely future needs.
Are you saving for a particular purpose such as school fees or helping your child get on the property ladder? Is the money you plan to put in the ISA everything you can afford to save or does it make up a relatively small proportion of your free cash?
Within this you need to make a judgement call as to the direction in which interest rates will move over the medium-term. A lot can happen in five years so get a feel for what relevant economists and financial advisers are expecting.
If you anticipate needing to get your hands on the money sooner rather than later then you're probably better off with an easy access cash ISA. This means you will be able to withdraw your money immediately rather than waiting for a notice period.
Even so it's best not to dip into ISA savings unless it's absolutely necessary, warns Kevin Mountford, head of savings at comparison website Moneysupermarket.com. "If you take money out of an ISA it can't be put back in and you lose the tax-free status on it," he points out. "You should, therefore, use other non-ISA savings first."
The headline rate being offered may look attractive but, in many instances, this will include a bonus that applies for, say, the first 12 months, after which it will fall back to a much lower level.
The final point concerns product terms. Some providers will only allow you to take out an ISA if you agree to certain conditions. This may include being an existing customer of the bank/building society or agreeing to open another product as well.
For example, Principality Building Society is offering a rate of 4.5 per cent on its one year bond – the Extra Cash ISA Issue 2 – as long as applicants open an Aviva stocks and shares ISA and spread the full £10,200 allowance between the two products.
Who is offering the best deals?
We asked Moneyfacts to list us the best and worst ISAs in the marketplace at the moment – as of 21 March, 2011. While rates and products vary on a daily basis, this should give you an idea of who to have faith in – and who to avoid.
As far as fixed-rate deals are concerned, Skipton Building Society is the best of the bunch, offering five per cent if you lock the money away for five years. Other providers that will give you more than four per cent include Cheshire Building Society, Bank of Scotland, Nationwide Building Society and Northern Rock.
Turning to variable-rate ISAs and one of the best rates currently available is from Santander and its Super Flexible ISA (Issue 2) which offers four per cent. However, there are conditions attached. You must fund a new or existing qualifying investment account with at least an equal amount.
Who is offering the worst deals?
Look closely at your current deal – if you already have a cash ISA – and if they're paying as little as the following list then it's time to change. One of the worst around, according to Moneyfacts, is Newcastle Building Society's Nova ISA Direct (2 plus withdrawals) that's paying a miserly 0.01 per cent.
However, there are plenty of others that are less than generous. In fact, the list of accounts paying just 0.1 per cent to savers includes ISAs from West Bromwich Building Society, Virgin Money, Bank of Scotland and Halifax.
How to change provider
You can easily change provider to one that offers better rates and terms – as long as you have not previously agreed to lock your money away for a set period. Some, for example, may let you take your money out but charge you a penalty fee.
If you are moving your money then remember to use the official ISA transfer process as any you take out yourself will lose its tax-free status. Also, if you want to transfer money you have put into your ISA in the current tax year, you must transfer all of it.
ISA providers are now required to transfer the money within 15 days, whereas previously it took on average of 26 days. Unfortunately, as the process is not fully automated, savers can lose out on valuable interest during the ISA transfer process.
However, prominent names such as Halifax, Lloyds TSB and Nationwide BS all have ISA promises in place, which include guarantees to pay interest from the first day they receive a transfer request to them.
Separately, new ISA rules that came into force this year also require providers to tell savers when a bonus comes to an end. This means you can take advantage of the best buy rates and be reminded to switch at the end of the bonus period. It's also worth remembering that subscriptions made to a Stocks and Shares ISA can only be transferred to another stocks and shares ISA. However, subscriptions to a cash ISA can be transferred to either another cash ISA or to a stocks and shares ISA.
Monitoring your decision
You might feel a sense of relief when you've completed your switch but don't sit back and forget your ISA for another year. Rates and products available are constantly changing and this is likely to continue into the new tax year.
The fact is that while some customers leave investing their ISA allowance to the last minute, others prefer to act at the start of a new tax year. The providers know this and that's why they offer products to attract these types of customers.
There are still too many ISA savers earning next to nothing on their money and this isn't because there aren't enough good rates out there, points out Julie Smith, savings analyst at the Fair Investment Company.
"Attractive introductory rates pull savers in but many either don't realise or don't remember that after a fixed time, these introductory rates come to an end and revert to earning little or no interest," she says. "These savers are losing out because they may not check their rate so have no idea it is no longer as competitive as they thought."
Despite being relatively simple products, the Financial Ombudsman Service investigates around 700 complaints about cash ISAs every year – and the biggest problem is delays.
These mainly concern delays in transfers, but issues also arise in the application process. As a matter of interest, the majority of delay-related cash ISA complaints received have actually been upheld over the past year.
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