Savers have seen rates fall dramatically in the last six months since the introduction of the Funding for Lending Scheme (FLS) which allows banks and building societies to borrow money at reduced rates so they don’t need to attract deposits from savers by offering higher interest rates.
According to Moneyfacts.co.uk the average rate paid for all cash ISAs has dropped from 2.45 per cent to 1.85 per cent since the introduction of the FLS six months ago. The average bonus rate has also dropped from 1.32 per cent to 0.90 per cent.
So, savers need to take advantage of any way possible to maximise their returns in the current climate.
Recent research from First Direct indicates that 62 per cent of ISA savers have never switched their funds. The research found that one in ten people did not know that you can transfer an ISA balance.
Andy Forbes from First Direct said: "It's surprising that such a large number of savers have never switched their account and, even more so, that many don't realise they can transfer their balance."
This means millions of savers are potentially losing out on the best rates available for their ISA savings. The ISA deadline is on April 5th and savers have the opportunity to invest up to £5,640 with the returns exempt from tax.
What are bonus rates?
Many ISA products attract savers with a high headline rate. However, many of these rates include a bonus rate that expires after 12 months and leaves investors with an uncompetitive rate.
In order to continue getting the highest rate ISA investors can transfer old ISA funds into ISA accounts that pay a higher rate. This means that you need to be vigilant in setting reminders of when your current ISAs bonus rate ends and then switching to the best available deal.
Unfortunately very few providers offer consistently competitive rates. If they did then switching wouldn't be such a problem.
According to Which?, the two most consistent ISA providers for rates have been the Leek Building Society and Harpenden. The Coventry Building Society has provided some good news in this respect as it says from the new tax year for 2013-14, it will raise the rates on all of its cash ISAs to 2.50 per cent.
Research from Moneysupermarket.com shows that in February 2012, the average rate paid by the top ten easy-access cash ISAs with bonuses was 2.92 per cent. However, almost half of this, 1.44 per cent, took the form of bonus rates which expire after 12 months.
Figures from the Inland Revenue reveal that 11.36 million people paid into a cash ISA last year, with nearly two-thirds of this number opting for an easy-access cash ISA. Many of these investors would have chosen an account with a bonus rate and Moneysupermarket suggests that if they had used the full ISA allowance last year of £5,340, by sticking with the same accounts and not switching to a better deal they would lose around £77 over the next 12 months.
If you have never switched your ISA, it is very likely that you could move your funds to an account that pays you more.
Not all ISA products accept transfers-in, but many do.
In this feature we will outline what you should do to check you are on the best rate and how to switch to a better deal if your ISA bonus rate has expired.
Variable ISA rates
If you opened a variable rate cash ISA ahead of last year’s ISA deadline then you could soon be missing out. If the deal had a bonus rate attached, it is likely to have been for 12 months and about to come to an end.
The bank’s try and entice an investor to open an account that pays a high initial rate. They then rely on the apathy of savers who forget or can’t be bothered to switch when the bonus rate expires.
For instance, last year Halifax offered 3.0 per cent on its cash ISA, but this included a bonus of 2.75 per cent for the first 12 months. So savers who went for this option will now see the rate reduced to just 0.25 per cent.
This means that though they would have earned interest of £160 if they had invested the full ISA allowance last year, if they were to keep the account running, they would earn just £13.30 in the next 12 months.
There are plenty of other examples and the only way to avoid losing out is to transfer your funds to a better paying cash ISA that accepts transfers-in.
Savers who have ISA balances in accounts that have been closed should also look at transferring as soon as possible. There are 540 cash ISAs that are close and 71 per cent of them are paying less than the current Bank of England base rate of 0.50 per cent.
The best options for a transfer
If your ISA savings are languishing on an uncompetitive rate you need to take action now to switch funds before the deadline of April 5th and to make the most of this year’s ISA allowance.
The best deal for a cash Isa that allows transfers-in still available is from Santander’s Direct ISA and the Cheshire Building Society’s cash ISA, both o which offer a rate of 2.50 per cent.
By switching your ISA balance from last year if you had put the full amount of £5,340 in, you would earn interest of £137.50 instead of £13.30.
However, again you need to set a reminder as both of these deals include a bonus rate of 2.0 per cent, Santander’s for 12 months and the Cheshire’s until the end of July 2014.
The best deal currently available that does not include a bonus rate and accept transfers-in is Virgin Money’s cash ISA that offers 2.15 per cent.
Tesco has recently increased the rate on its Instant Access Cash ISA to 2.30 per cent, of which only 0.30 per cent is a bonus.
There are better rates available but only ones where you need to invest high levels of income or keep your money invested for a longer period.
First Direct offer 3.0 per cent on balances above £40,000 with no bonus and HSBC’s Variable Rate Cash ISA offers 2.75 per cent on balances above £15,000.
The best fixed-rate deal for two years is Santander’s that pays 2.80 per cent and includes a 0.1 per cent bonus if Rory McIlroy wins one of golf’s four major titles.
Halifax offers the best of the three and five-year fixed rate deals paying 3.0 and 3.10 per cent respectively. Savers are also automatically entered into a savers prize draw where each month three prizes of £100,000 are on offer.
How to switch your ISA
It is relatively straightforward to transfer your Isa balance but you need to let your new provider do it for you because taking the money out and re-investing it yourself means the funds lose their tax-free status.
Many new ISA providers will start offering to pay interest from the date of the transfer which is an improvement on how the system used to work. Transfers should take no more than 15 days.
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