For the past decade, many banks have been operating a nice little Isa moneyspinner: lure people in with tempting interest offers then drop the rate after, say, a year. The banks know that the perceived hassle of switching Isas means lots of people leave their money earning a pitiful rate. Others, having signed up, forget to check what rate they are earning later.
And those who do decide to switch to a higher-rate Isa have been stuck waiting an average of 26 days for the money to move from one Isa to another. More wonderful news for the banks – all that time the money is somewhere in the ether, neither the old bank nor the new has had to pay the customer any interest. So thank goodness this unscrupulous practice is finally being curtailed. In March, the watchdog Consumer Focus made a formal complaint to the Office of Fair Trading (OFT). It claimed that cash Isas pay derisory rates of interest and banks use unfair obstacles to stop people from switching to better deals. The OFT responded this week with an in-depth report. It has demanded that by the end of this year banks reduce the amount of time it takes to transfer an Isa to 15 days.
This is an improvement, although still quite a time to transfer a relatively simple account. Particularly when you consider that many banks will switch funds in standard accounts instantly. The OFT has said that ultimately it wants it to take “just a handful” of days for the transfer process to be complete. But since no timescale has been put on that, don’t expect banks to rush to conform. The better news is that the OFT has also stated that banks must publish an account’s interest rate on an annual statement so customers can see if they’re getting a good deal. With so many Isas offering introductory rates, it’s important to keep an eye out for when your bonus rate ends. Be ready to transfer your cash when it does.
Last month the average Isa was paying just 0.41% in interest according to Consumer Focus. But the best buy Isas are paying much more. Nationwide’s instant access e-Isa pays 2.75%, including a 1% bonus rate for a year. Or you can get 3.75% for three years with Northern Rock’s Fixed Rate Isa issue 135. Both accounts accept transfers from other Isas. But be careful if you decide to switch that you follow the rules for an Isa transfer. If you just withdraw your cash and try to reinvest it, that money loses its Isa status; you then can only reinvest up to your annual cash Isa limit of £5,100.