Although there’s lots of doom and gloom, ISAs are still worth it.

28th February 2013

Although there is little indication that interest rates are going to improve by a great deal any time soon, there has been a small nudge in the right direction this month from a smattering of providers launching new competitive fixed rates.  Although there are no non-ISA accounts that beat or match CPI inflation at 2.70%, there is an increase in the number of Cash ISAs that do.  Last month there were only three but this month sees six cash ISAs available paying 2.70% or more, tax free. See table below for more details.

Cash ISAs which match or beat inflation

Provider

 

A/C Name

Min

Gross Rate

AER

Bonus

Notes

Coventry BS

60 Days’ Notice ISA (3)

£1

2.80%

2.80%

0.60% for 12 months

60 Day notice or loss of interest on withdrawals, no transfers allowed

Nationwide BS

4 Year Fixed Rate ISA

£1

2.70%

2.70%

N/A

Access on closure only

Cheshire BS

4 Year Fixed Rate ISA

£1

2.70%

2.70%

N/A

Access on closure only

Derbyshire BS

4 Year Fixed Rate ISA

£1

2.70%

2.70%

N/A

Access on closure only

Dunfermline BS

4 Year Fixed Rate ISA

£1

2.70%

2.70%

N/A

Access on closure only

Halifax

5 Year Fixed Rate ISA

£500

2.70%

2.70%

N/A

Access on closure only

 

There are also three ISAs which are available for those who have built up larger balances, although as you wold expect, certain conditions apply.

Other ISAs for those with larger balances to transfer

Provider

 

A/C Name

Min

Gross Rate

AER

Bonus

Notes

First Direct

Cash ISA

£40,000

2.96%

3.00%

N/A

Easy Access. Must hold a First Direct 1st Account.

Marsden BS

Members Reward ISA

£50,000

2.75%

2.75%

N/A

Only available to members of Marsden BS for 5yrs +

HSBC

Cash E-ISA

£15,000

2.72%

2.75%

N/A

Easy Access. Must have an HSBC current account.

Over the last few weeks, high street names including Nationwide group and Halifax, have been jostling for the top spot on some fixed rate ISAs, so are we beginning to see the start of an ISA season? Perhaps, but it’s still too early to tell.

Although we believe it’s going to be an underwhelming ISA season this year, we still think it’s important for savers to consider using their cash ISA allowance, especially given the announcement that the Bank of England expects inflation to remain above the 2% target for two years. Keeping money in a tax efficient environment is even more vital.

Some savers may see little benefit in using their ISA allowance and below are a few of the reasons – plus our response to them:

“The allowance is so small it’s not worth it.”

Did you know that if you had saved the maximum into a Cash ISA since they were introduced in April 1999, and each year the rate of interest earned was equivalent to the Bank of England Base Rate, your ISA could have grown to around £60,000! And if you had invested into TESSAs before that you could add an extra £13,000 – so in total a tax free pot of approximately £73,000!

“But the rates are so poor!”

Not only is the interest you can earn tax free, but at the moment the rates on easy access and notice ISAs are better than on the equivalent taxable accounts – even for non-taxpayers. Take a look at our best buy tablesto compare.

“Isn’t an ISA high risk?”

The full ISA allowance (for the current tax year) is £11,280 and up to the full allowance can be invested into a stocks and shares ISA which is considered higher risk, as the capital value can fluctuate and fall as well as rise.

However, up to half of the allowance can be put into a cash ISA, with no obligation to also open a stocks and shares ISA; great for those who would prefer to remain in cash.  And, as a savings account, this cash ISA money is protected under the Financial Services Compensation Scheme. *

“Can I access my money – isn’t it a long term investment?”

As a cash ISA is simply a tax free wrapper around a savings account, savers can choose an easy access ISA or notice ISA, both of which allow access.  However it’s worth noting that any money taken out cannot simply be replaced; that part of the allowance would be lost forever! There are also fixed rate ISAs which normally don’t allow penalty free access to the money within the term.

“If I can only have one cash ISA, what happens if the rate becomes dreadful?”

The good news is that you can actually open a cash ISA with one different provider each year – plus you are allowed to transfer all of your ISAs if the rates become uncompetitive. The normal restrictions apply in terms of accessibility depending on the type of account and the specific terms and conditions. In addition you must be careful to follow the rules when transferring. Don’t simply encash, as doing this will result in the loss of your ISA allowance altogether. Instead complete an ISA transfer form with your new provider and they will process the transfer for you.

With interest rates still at record lows, it’s important that savers do all they can to cream as much interest as possible from their savings - and tax free interest is one of the first steps.

* Financial Services Compensation Scheme (FSCS)       

This provides protection on your savings accounts, in the event that a bank or building society goes bust. The Financial Services Compensation Scheme (FSCS) protects a total of £85,000 of cash deposits - including cash ISAs - per person, per bank licence.

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