Savers need to be ready. The end of the tax year – 5 April – is approaching fast. That means the window for using your cash Isa allowance is narrowing for 2011/2012 – and no one wants to waste the opportunity to earn tax-free interest. So what are the common pitfalls to avoid before committing your cash?
Firstly, don’t be too hasty. Sure, the £5,340 maximum deposit has to be committed before the end of the tax year, and it’s offered on a ‘use it or lose it’ basis. However, many of the best Isa rates are only released close to 5 April as the banks engage in a last-minute marketing drive to get your money. So it’s probably worth your while hanging on to see what the best last-minute deals will be.
Next, it pays to be nimble in this market. To get you in, providers will often offer a juicy initial rate – typically containing a heavy bonus element for the first year – and then cut it later. At that point, you need to be ready to move. As Rosie Murray-West notes in The Daily Telegraph, “five out of six of the best-buy products from the peak of last year’s Isa season will see interest rates drop drastically in the next few months”. Two will have their rate cut to the bank rate of just 0.5%.
The next problem is that some of the market-leading accounts do not allow balance transfers in. That’s the case with the Cheshire Direct Cash Isa, which offers a market-leading 3.06% variable rate (including a 2.06% bonus). Some providers may also hit you for transfer charges when you leave. Nonetheless, do take the time to shop around, or your money may languish in an old Isa account that pays way below the rate of inflation.
Another trap for the unwary is the minimum balance requirement. On the Cheshire Building Society account, for example, it’s £1,000 – drop below that and your interest rate drops to 0.25%. The next thing to consider is how long you can afford to tie your money up. Increasing numbers of Isas offer better rates to long-term savers. Halifax offers a rate of 4.4% fixed for five years on a minimum opening deposit of £500. But no additional deposits or withdrawals are permitted during the term and early closure would cost you one year’s interest.
By comparison, the best junior Isa rate around, for those who want to save something for their children this way, is 3%. That’s on offer from Lloyds TSB and the Nationwide building society. Sites such as Moneysupermarket.com and Moneyfacts.co.uk are a good place to find the best rates. Now’s a good time to get organised.