Switch your ISA before the bonus runs out

That attractive introductory offer could be about to expire, leaving you with a disappointingly low rate of interest. Chiara Cavaglieri reports

The banks and building societies want your savings cash and are using every trick in the book to get it. But experts warn against being blinded by introductory bonuses and to review old cash individual savings accounts (ISAs). Last year's best buy is likely to be this year's also-ran.

Only a few weeks are left before the new tax year starts on 6 April. Looking at the current headline rates, there's not much in it – a mere 0.35 per cent separates the top five instant access ISAs. Where the gap widens, however, is on the bonus element.

"At one end of the scale the bonus on the Barclays Golden ISA 3 is just 1 per cent, whereas with the latest deals from Santander and Halifax, it accounts for a very hefty 2.8 per cent and 2.5 per cent respectively of the overall rate," says Andrew Hagger of Moneynet.co.uk.

While this is no problem for savvy savers happy to switch their ISA as soon as the bonus period expires, any hesitation will leave you stuck with a pitiful return on your cash. It could also mean an account offering a better initial return could actually leave you worse off in the long run.

Take the Santander Flexible ISA (issue 3): this pays a healthy 3.3 per cent interest, and if you were to invest the full cash allowance of £5,340 for the new 2011-12 tax year, you would earn £176.22 over 12 months. When the 2.8 per cent bonus falls away, however, two months' worth of interest on that lump sum is a paltry £4.45, bringing the total earned over 14 months to £180.67. In comparison, the Barclays Golden ISA 3 pays 3.25 per cent and after 12 months the interest would be only £173.55, but once the 1 per cent bonus expires, two months' interest at £20.03 brings the running total to £193.58.

These figures should serve as a warning if you have yet to move your money away from one of last year's top ISAs and are coming up to the end of your bonus period. Some of the best buys from March 2010 are set to nosedive when the 12-month bonus period is up. Santander's Flexible ISA will fall from 3.5 per cent to just 0.5 per cent and other accounts are following suit, with Barclays Golden ISA customers facing a 1 per centage point drop from 3.06 to 2.06 per cent. The Nationwide e-ISA, which paid 2.75 per cent last year, is also due to drop by 1 per centage point at the end of June.

If you want to open a new account, be warned that some of these bonuses are getting even bigger – Nationwide's new e-ISA will face a big drop this year with a 1.35 per cent bonus taking the shine off the headline 3.1 per cent rate, fixed until 31 July 2012.

Beyond last year's top accounts, others could now be paying as little as 0.01 per cent as with the Nova ISA Direct from Newcastle BS. Some are offering marginally more at 0.1 per cent, including the Halifax ISA Saver, Santander Easy ISA, West Bromwich BS Easy Access ISA and Virgin Money Cash ISA.

"The rates on variable ISAs currently range between 0.01 per cent and 3.35 per cent. On this year's allowance of £5,100 that is the difference between 51p in annual interest and £274," says Michelle Slade of comparison site Moneyfacts.co.uk.

With so many accounts languishing on low rates, it's vital to find out what rate your existing ISAs are on. This can be easier said than done with many providers using similar names for different accounts to make it that little bit more difficult, but new rules require providers to write to customers before a bonus expires.

If you know your money is struggling, switch to a better rate by finding an account which permits transfers. Not all do and, indeed, some of the highest-paying accounts don't. The top accounts tend to include a temporary bonus, so remember you will probably need to transfer the cash again once that expires.

"Since the Bank of England decimated interest rates in 2008, using bonuses has been the way that most cash ISAs have been structured," says Dan Clayden from independent financial adviser Clayden Associates. These accounts prey on investors' inertia so people have got to be prepared to give themselves time if they want to move to another account."

At the moment, the best buys accepting transfers are the Nationwide e-ISA mentioned above, the Halifax ISA Direct Reward (which pays 3 per cent including a 2.5 per cent bonus for 12 months) and the Kent Reliance 2012 Bonus Cash ISA, which pays 2.87 per cent including a 2.12 per cent bonus until 30 June 2012.

Transferring is relatively straightforward. You can contribute to only one cash ISA in any tax year, but existing ISA holdings can be moved to another provider as often as you like. If you have old ISA money on a rubbish rate, simply move it to another bank offering a more attractive rate, but never simply withdraw the money as you need to follow the correct procedure. Your new provider will pass on the relevant paperwork and arrange the transfer which should take no longer than 15 days to complete.

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