The end of the tax year – 5 April – is getting closer. And for savers this means you haven’t got long to use up this year’s Isa allowance. So, it’s time to get organised and take a look at your current Isa accounts and make sure you’ve got the best deals for the year ahead. But what do you need to look out for when choosing your account?
Even though inflation has fallen recently, it’s still a tricky task to make sure your savings aren’t eroded by rising prices. Normal savings accounts would need to pay around 4.5% interest to protect basic-rate taxpayers and 6% for higher-rate taxpayers, writes Jill Insley in The Guardian. However, the average rate on offer for no-notice savings accounts is a miserly 0.92%.
So, what can you do to keep inflation and the taxman at bay? From 6 April 2012 you’ll be able to salt away £5,640 per year in a cash Isa, without paying any income tax on the interest. Because of this tax break, cash Isas need to pay a lot less interest to beat inflation. Moneyfacts.co.uk reckon there are 47 savings accounts that currently edge inflation and “many… are fixed-rate Isas”.
With so many good accounts on offer, beating inflation should be easy, right? Maybe not. Isa providers love to lure new savers in with tempting bonus rates, but these often fall away after one year. As Rosie Murray-West points out in The Daily Telegraph, savers who went for last year’s “best buy” Isas will soon find their savings rates dropping to as low as 0.5%.
Assuming retail price inflation of 4.3%, “the average Isa balance of £5,100 would be worth more than £160 less at the end of the year”. Take Santander’s Loyalty Flexible Isa. In March 2011 it was a best-buy offering 3.5% interest. This year that will soon drop to 0.5%. The story is the same elsewhere on the high street. For example, Barclays Golden Isa Issue 3 will drop from 3.25% to 2.22%.
When it comes to financial services, loyalty doesn’t pay. The best bet is to be a ‘rate tart’ – take advantage of attached ‘bonuses’ while they last and move your money at the end of any fixed period. For example, one of the leading variable-rate Isas, Cheshire Direct Cash Isa, offers 3.06% on deposits of over £1,000, but this includes a 2.06% bonus. So the rate will drop to 1% when the bonus deal expires on 30 September 2013. We are not saying avoid attractive bonuses – just be ready to move on.
There are other pitfalls too, such as minimum balances (which can range from £1 to several thousand pounds), the length of time you are locking your money away, and whether or not you can transfer your Isa balance into a new account. For example, the AA instant access Isa doesn’t allow transfers in, but a similar Isa from M&S at a slightly lower 3.0% does. Don’t withdraw any money yourself when it comes to transferring it across, or you risk losing the tax shelter altogther. Instead, instruct your new provider to arrange the transfer directly between the accounts.
The longer you lock up your money, the better the rate. The best five-year fixed-rate cash Isa, according to Which?, pays 4.35%. But don’t rush in. As deadline day approaches, banks compete to attract customers, often releasing the best deals at the last moment. So start deciding on the type of product you want now and keep your eyes peeled.
Ten of the best cash Isas
| Account | % AER | Tfr in? | Notes |
|---|---|---|---|
| AA Internet Access Isa Issue 2 | 3.05 | N | Instant access Isa, requires a minimum deposit of £500. Rate drops to 0.5% after 12 months. |
| Aldermore One-year Fixed Rate Isa | 3.35 | Y | Fixed-rate, requires an initial £1,000 deposit. One lump-sum deposit only. Interest 0.5% if balance drops below £1,000. |
| M&S Money Advantage Cash Isa | 3 | Y | Variable-rate, instant-access only, requires an initial deposit of £25 a month by direct debit or a £100 lump sum. |
| Post Office Two-year Fixed Rate Isa | 3.6 | Y | Two-year fixed rate. Minimum investment £500. One lump-sum deposit only. |
| Metro Bank One-year Fixed Rate Isa Issue 2 | 3.25 | Y | One-year fixed account. One lump-sum deposit. 180-day interest penalty for withdrawals. |
| Aldermore 60 Day Cash Isa Issue 2 | 3.15 | Y | Requires 60 days notice of withdrawal, minimum £1,000 investment. |
| BM Savings Two-year Fixed Rate | 3.6 | Y | Two-year fixed rate. £500 deposit needed. Penalties for early withdrawals. Account operated by post only. |
| C&G Fixed Rate Isa 13 | 3.9 | Y | Three-year fixed-rate, minimum deposit £100. 120-day interest penalty for withdrawals. Withdrawals by post (cheque) only. |
| Yorkshire Bank Cash Isa Fixed Rate Bond 16 | 4.25 | Y | Five-year Isa, minimum deposit £2,000. Withdrawals incur minimum £30 charge, and account closure. |
| Cheshire Direct Cash Isa | 3.06 | N | Instant access, minimum balance £1,000 (drops to 0.25% if below). |