Savers seeking the most effective way to save should not only build up a tax free savings pot using ISAs, but also be aware of the rates paid on balances to ensure they are earning the best ISA rates.
This usually means transferring cash ISAs to get a better deal, but what are the rules around moving your cash between ISAs?
Which4U is aware that many savers are either baffled by the rules around ISAs, or not given useful information from providers.
Many accounts offer introductory bonus rates that only last for a specified period, after which the rate falls significantly, sometimes without savers even being aware. See our guide to Savings and Bonus Rates.
This means that many savers are earning pittance on their funds, which defeats the object of opening an ISA in the first place.
Out of the £163 billion currently invested in cash ISAs in the UK, the average rate paid is just 0.4%, down from 4.36% last year.
Some accounts, including the Alliance & Leicester Branch ISA, Abbey Easy ISA, Barclays Cash ISA and Halifax ISA Saver pay just 0.10%, the equivalent to earning a measly £1 per year for every £1,000 in the account.
However, do a bit of searching for the best ISA rate and you could earn around 3% – that’s 30 times more interest than the account mentioned above.
The Abbey Direct ISA pays 3% on balances of £9,000 or more, allowing you to transfer previous years ISAs. The account is based on a 12 month period, offering no withdrawal restrictions.
Alternatively you could go for the ING Direct Cash ISA, offering 2.5% on all balances, although you cannot transfer an existing ISA across to this account, so would be better for someone that is new to ISAs.
The Natwest e-ISA also allows savers to deposit between £1 and £10,000 to qualify for 2.0% AER, or 2.25% for balances between £10,000 and £30,000. anything over £30,000 pays 2.50%. This account comes with no withdrawal Penalties and allows customers to transfer existing ISA balances across.
Not all top-paying accounts allow transfers, it is up to each bank or building society to decide.
There are strict rules around transfers, so always make sure you understand them before attempting to switch ISA providers. First of all, the most important rule of all is to never attempt to move the funds over yourself. This is ALWAYS done by the bank/building society you wish to transfer to and attempting to withdraw your funds in order to move them across to the new account would result in you being unable to deposit your full balance back into an ISA, with you being limited to the annual amount and effectively ruining the previous years spent building up your pot.
Luckily, the ISA transfer process has improved since over the few years or so, when some savers were made to wait months for their money to be moved.
New guidelines have been implemented which will shorten the switching process from the 30 days permitted by HM Revenue & Customs to 23 business days for cash ISAs.
Several banking institutions have set up a new system to allow cash ISA funds to be moved between them electronically, which could reduce transfer times to just 12 days. These include Lloyds Banking Group, Abbey and RBS NatWest.
These are the basic ISA rules:
- You can transfer your savings from one cash ISA provider to another, provided that your chosen account accepts transfers. (See our guide to transferring cash ISAs for more details)
- If you wish to transfer a cash ISA opened in the current tax year (April 2009 to April 2010), you can do so but if you transfer the whole balance to the new provider.
- With cash ISAs opened on or before April 5 2009, you can transfer some of or all to the new provider.
- The current ISA allowance for those aged 50 and above is £10,200, and £7,200 for everyone else. In the new tax year (April 6th 2010) all savers will be eligible to save up to £10,200 in cash ISAs and stocks and shares ISAs.
- You can use your entire annual ISA allowance to invest in stocks and shares ISAs, but you may only invest half into a cash ISA.