ISAS: Protected from the unkind cuts

With rates so low, ISAs give you more for your cash, says Kathleen Hennessy

Spring may be here but these are dark days indeed for savers. With six base rates cuts since October 1998 and many analysts predicting further reductions, it is hard to get a decent return on your savings.

The introduction of ISAs couldn't have been better timed for savers. These allow you to save up to pounds 3,000 in a bank or building society account this tax year and up to pounds 1,000 after that. These limits apply whether you opt for a mini cash ISA or a maxi ISA with a cash component (see page 7 for the rules on mini and maxi ISAs).

Because interest is paid free of income tax, you get more for your money than in a standard deposit account. Egg is currently paying 6 per cent on balances as low as pounds 1. But as savings interest is subject to 20 per cent tax - or 40 per cent for higher rate taxpayers - that return is reduced to 4.8 per cent, just 3.6 per cent for higher earners. But an ISA paying 6 per cent will actually pay 6 per cent.

There is no shortage of account providers paying more than 5 per cent on their cash ISAs. But a high rate isn't always the wonderful deal it appears. Some providers expect your undivided loyalty in return for good rates and many impose punitive access terms, requiring you to give up to six months' notice before you can touch your cash.

However, the CAT standards introduced by the Government to ensure a fair deal for savers can help point you in the direction of no-notice and instant- access accounts. One of the conditions that cash ISAs must fulfil to achieve a CAT mark is to allow savers access to their money within seven days or less. They also cannot impose a minimum deposit or withdrawal sum of more than pounds 10. This is why Norwich & Peterborough's account, which offers an otherwise excellent 6.75 per cent, is non-CAT marked. Although it allows instant access, it also requires the maximum pounds 3,000 investment to open the account.

But you can still get good rates without tying up your money. Nationwide BS, First Direct and Woolwich are all offering instant-access or no-notice accounts paying at least 6 per cent on balances of just pounds 1, while Safeway and Abbey National offer similar deals on balances of pounds 10. And don't forget that some accounts offer tiered rates for higher balances. So Alliance & Leicester's not terribly thrilling 5.9 per cent on pounds 1 becomes 6.5 per cent on pounds 3,000. If you're planning to invest the maximum, especially as a lump sum, this may be worth a look.

Some providers are offering guarantees with their rates. National Savings, Abbey National, Co-operative Bank, Norwich & Peterborough BS, Safeway and Yorkshire BS all guarantee at least to match the base rate until April 2000.

You'd be better off choosing your ISA according to your particular requirements: do you need instant access, for example? Are you interested in making the maximum cash investment as a lump sum? And once you've narrowed your choice down to fit those criteria, there may even be a bonus.

Some of the best rates on offer are from building societies. If you hold an account with one of these societies and it converts to bank status or is taken over, you could get a windfall payout. But read the small print: many mutuals now require new savers to give to charity any windfalls that may occur. So savers with an eye on the Portman, Coventry, Nationwide, Britannia and Newcastle building societies could direct their attention elsewhere; perhaps to the Furness, Norwich & Peterborough, Market Harborough or Tipton & Coseley societies.

And if you're one of the prudent savers who took out a Tessa while you still had time, there's a further ISA option. You can invest the capital from a maturing Tessa - up to pounds 9,000 - in a Tessa-only ISA. You can't stick your interest in there as well but as investing the capital in a Tessa-only ISA doesn't affect your ISA investment limit for that year, you can still invest up to pounds 3,000 in 1999/2000 and up to pounds 1,000 thereafter, depending on when your Tessa matures.

The personal finance website, www.moneyeXtra.com, has a free online service designed to help savers locate the best rates on an ISA. Key in the amount you want to save monthly, annually or as a lump sum and the level of access you require. The system then pulls out the accounts paying the top rates at that time.

But beware: chosen accounts are based on the highest rate they pay, even where that rate is available only on higher balances and the user has indicated a lower level of saving.

LEADING LIGHTS

TOP MINI CASH ISAS

Norwich & Peterborough BS: 6.75 per cent. Instant access, no CAT mark. Min pounds 3,000. Tel 0800 883322.

Skipton BS: 6.60 per cent. Access on closure, no CAT mark. Min pounds 3,000. Tel 0800 446776.

Nationwide BS: 6.50 per cent. Instant access, CAT marked. Min pounds 1. Tel 0500 302010.

TOP TESSA-ONLY ISAS

Norwich & Peterborough BS: 6.75 per cent. Instant access. Min pounds 1,000. Tel 0800 883322.

Coventry BS: 6.50 per cent. Instant access. Min pounds 500. Tel 0845 766 5522.

Source: Moneyfacts