Money: Hold your horses for better ISA offers

Rates could improve if you bide your time, says Clifford German
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Individual Savings Accounts go on sale on Tuesday - the first day of the tax year - replacing Tessas and PEPs as the tax-free investment account available to everyone over the age of 17. Cash-based ISAs are savings accounts with banks and building societies. Like ordinary accounts, cash-based ISAs will offer different rates of interest depending on the amount invested and the notice required to access the money.

Investors will get better rates for variable-rate money than for fixed- rate deposits. Some providers will offer better variable rates for larger and longer-term deposits, but only instant-access accounts are entitled to use the government-approved CAT-mark, which stands for "charges, access and terms". The CAT-mark does not guarantee best available rates, but it does guarantee easy access and no charges, as well as the opportunity to open an account with as little as pounds 10.

Opening rates on cash ISAs announced so far range from 5.75 per cent with National Savings and Virgin Direct, to 5.9 per cent at Alliance & Leicester, 6 per cent at First Direct and at Safeway, and 6.5 per cent at Abbey National, Halifax and Nationwide Building Society. But to get the top rate, Abbey and Halifax want a deposit of pounds 3,000. The Nationwide is offering 6.5 per cent on everything from pounds 1 upwards.

Cash ISAs that do not qualify for a CAT mark (because they require a minimum investment of more than pounds 10 or more than seven days' notice on withdrawals) should offer even better rates, but the differentials so far are hardly worth chasing.

The best rate so far is 6.75 per cent from Norwich & Peterborough on minimum deposits of pounds 1,000 from existing customers and pounds 3,000 from new ones.

The main disadvantage of a cash ISA compared with a Tessa is the smaller amount you can keep in the ISA account.

In the first year, investors can put up to pounds 3,000 into a cash ISA, but that falls to pounds 1,000 in subsequent years. Investors who open a Tessa before they are withdrawn - the Nationwide building society is one of a few providers opening its branches tomorrow for last-minute Tessas - can still build up to the maximum pounds 9,000 over the next five years, and have a cash ISA simultaneously. When the Tessa matures, they can transfer all the capital into a Tessa Maturity ISA that can run alongside a new ISA.

Don't rush to open a cash ISA. Some providers could put rates up if they feel they are not attracting enough business. More importantly, many ISA providers will only offer a cash mini-ISA. If you also want to invest up to pounds 1,000 in an insurance linked ISA or up to pounds 3,000 in an ISA that invests in shares or corporate bonds, you can choose to do so with separate mini-ISA accounts from different providers.

The big pitfall awaits those who want a so-called maxi-ISA that allows you to invest more than pounds 3,000 (and up to the maximum of pounds 7,000 for 1999- 2000) in shares. If you open a cash mini ISA, you have blown your chance to put more than pounds 3,000 into the stock market.

The other thing you need to watch is the interest rate. There will be fixed-rate ISAs just as there are fixed-rate Tessas. When interest rates are expected to fall, the rates of interest on opening a new fixed-rate account are substantially less than an ordinary ISA is paying now, and there could be penalties for early withdrawals.

But providers of variable rate ISAs and Tessas are free to change the rate of interest that they pay at short notice. In an attempt to assure potential investors, leading providers of cash ISAs have all offered guarantees that rates will not fall out of line with benchmark interest rates - usually base rate.

Existing Tessas do not offer any such interest-rate guarantees, and may well become uncompetitive. If you are not happy with the rate you are getting, you can still switch your Tessa from one provider to another, but watch out for penalty clauses.

It will be easy to switch your ISA from one provider to another, but if you take out a cash ISA which does not offer instant access, you may have to give up to 90 days' notice or lose up to 90 days' interest, so ask what the transfer penalties might be before you open an account.

n Details of ISA accounts available at bank and building branches. The following also operate by phone and post: National Savings, 0645 645000; Norwich & Peterborough, 0800 883322; Safeway, 0800 995995; Virgin Direct, 0845 610 1020.


Some of the best include:

Abbey National, 0800 222397; HSBC, 0800 520420; Standard Life Bank, 0845 603 3003; Virgin, 0845 610 1030.