Is it time to switch your Isa?

By Staff Writer Ruth Jackson Feb 09, 2010

Ruth Jackson

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Branch of Cheltenham & Gloucester bank © Bloomberg via Getty Images

Cheltenham & Gloucester offers existing customers just 0.05% a year

How much interest is your Isa earning?

Unless you just opened your account, chances are you don't know the answer to that question. But you should find out. More than 1m savers are earning just 0.1% interest on their cash individual savings accounts (Isas).

You may think that can't be you, because you would never have opened an account paying such a paltry rate of interest. But the interest rate you signed up to may not be the one you're getting now: there are a number of reasons why your interest rate could have plummeted.

Anyone who opened variable rate Isas will have been hit by the fall in the Bank of England base rate, for example. This has been sitting at 0.5% since March 2009. That's bad enough, but it is also worth remembering that many variable rate accounts pay a bonus rate for the first year before reducing the actual rate to almost nothing.

Savers who opted for fixed rate Isas several years ago will also need to double check their accounts: if your fixed rate has ended and you haven't shifted the money, it has probably been switched onto a new, and utterly dismal, rate.

How dismal? Very. Some Cheltenham & Gloucester Isa customers are getting just 0.05% in annual interest – that's a return of £1.80 a year on a balance of £3,600.

Should you give up on Isas altogether?

There are some standard savings accounts out there that are offering higher interest rates than Isas. So should you abandon your Isa? According to Moneyfacts.co.uk, the top one-year fixed cash Isa is from Bank of Cyprus UK, paying 3.33%. But the best taxed savings deal out there - with Firstsave - pays 3.65%. That sounds tempting. But don't jump in.

Once you factor in the tax, the rate falls right back down – to a return of 2.92% for basic-rate taxpayers, and 2.19% for those on the higher rate. And even if you found a standard savings deal paying much more than that, don't forget that if you withdraw your Isa money you can only reinvest up to your annual Isa allowance (£3,600 at present, unless you are over 50, in which case it is £5,100): the tax breaks on anything over that will be lost forever. So, overall you are probably better off leaving your savings in Isas and getting the best tax-free rate of interest.

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What can you do to improve your return?

Obviously, you need to check your rate and see if you could improve it by switching to another Isa. But be careful how you do this. Don't just withdraw your money – it loses its tax-free status if you don't do things properly. First make sure the new Isa you want accepts Isa transfers, and then fill out the proper paperwork to transfer the money.

The best rate available for Isa transfers is with Leeds Building Society - 4.6%. However, to get that you have to lock away your money until 2015. That's probably not a good idea right now: with base rates at rock bottom the only way is up, something that means the Leeds deal might not look so good in, say, 2012.

Instead, opt for a short-term fixed rate. These pay more than the variable rate Isas, and if you only lock in for one year you are unlikely to be left behind by new deals. The best short-term rate available for Isa transfers is 3.33% with the Bank of Cyprus UK's one-year bond. Otherwise, there is Ipswich Building Society's Fixed Rate ISA 10  which is offering 3.25% and matures on 31/10/2011. Those with large amounts to transfer should note that the Ipswich Building Society Fixed Rate Isa 10 pays 3.5% interest on balances over £20,000. Unfortunately, this account is limited to savers living in certain East Anglian postcodes.

However, I suspect that your best bet might be to stick with your bad interest rate a little longer. With the end of the tax year looming – and thus this year's Isa deadline – the banks will start releasing new deals. In the run up to 6 April, if competition kicks off like it usually does, much much better rates will appear. So wait a little bit longer and seize one of the higher rates on offer at the end of March.

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Comments (6)

Published in Personal finance | More articles by Ruth Jackson

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  • 1. Broomtree

    (09 February 2010, 11:20PM)  Complain about this comment

    Those Ipswich ISA's are Post Code restricted!

  • 2. Alan

    (10 February 2010, 05:13PM)  Complain about this comment

    Well done Ruth. Another very readable and informative article. Thanks!

  • 3. Omar

    (13 February 2010, 04:53AM)  Complain about this comment

    This is a really good advice for anyone who has not moved their ISA recently. I checked my Variable Rate Cash ISA with HSBC in December 2009 only to find the rate had dropped to 0.3% AER. I transferred it to Santander's Direct ISA (Issue 3) paying 3% AER including a 1% bonus for 12 months and I intend to move it again after the bonus period is finished if they do not release a new issue with better rates.

    Also, the employee that transferred my ISA informed me that Santander periodically launch new ISA issues with better rates but they do not notify their existing customers and that its up to me to check their website and request to be moved to the new issue with the better rates.

    This is done simply by completing a transfer form and it takes 5 working days for the transfer to complete.

  • 4. Angela

    (13 February 2010, 11:11PM)  Complain about this comment

    Santander are consistently offering the best rates.

    One wonders why a Spanish bank is in a better financial position in view of the well known current problems in the Spanish economy.

    I wonder what level of deposit it guarantees, and whether it is too big to fail.

  • 5. david

    (14 February 2010, 10:14AM)  Complain about this comment

    It seems a little pointless to mention that the Ipswich Buliding Society has the best I.S.A rates when less than 1 in 100 readers will be able to benefit as the offer is limited to a very few small post code areas.

  • 6. Moderator

    (15 February 2010, 05:12PM)  Complain about this comment

    Broomtree & David - you're quite right. The Ipswich ISA is limited to "existing members or to residents in postcode areas IP, CO, CM, NR, CB & PE only"

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