Previously, on IS4
- 27-02-12: Nationwide leads the way, at 3.10%.
- 02-03-12: Cheshire strikes the front, at 3.16%.
- 05-03-12: Santander’s new rates reach 3.30%.
- 08-03-12: Cheshire is poised to re-take the lead at 3.35%.
The battle over ISAs has taken another development as the Cheshire Building Society, parented by Nationwide, re-raised its instant access cash ISA rates to 3.35% to seize the initiative back from Santander.
It seemed like Santander’s ‘Promethean’ revelation of its latest ISA rates would prove to be the last word on the matter – at 3.30% AER for the instant access cash ISA and 4.00% AER for the two-year fixed-rate ISA. But Nationwide and Cheshire were not ready to surrender there and they have struck back with interest.
Savers signing up for the Cheshire BS Direct Cash ISA will receive 3.35% for 18 months (bonus expiry 30-09-13), while those able to avoid withdrawals for this same period could opt for the 18-month fixed-rate ISA, at a towering 4.05%.
This bidding process between the Nationwide and Santander Groups has seen the market-leading rate for instant access ISAs soar by 25 basis points in just over a week. It’s a timely bonus for savers, whose reluctance to switch frequently has often led to them harbouring poor-performing ISAs for long periods of time.
The Cheshire Direct ISA has come under criticism for its lack of accessbility. It requires a £1,000 opening deposit, operates by post, and – the sticking point for most analysts – does not allow inbound ISA transfers.
That is to say, if you have a £10,000 ISA pot that needs a more profitable home, you will not be able to transfer this automatically across to the Cheshire Direct ISA. If you manually withdraw funds, they will cease to be tax-free and will therefore count towards the current year’s allowance if invested elsewhere.
Santander’s Direct ISA 9 does allow transfers, and the bank believes that its rates continue to offer the best value based on that facility alone. It appears unlikely that Santander will advance this battle of wills any further, then, as they leave savers and media to propagate the merits of their ‘superior proposition’.
Adjust for Daylight Savings Patterns
Only, most analysts seem to have overlooked the broader issue here – that British saving patterns, on average, are not traditionally governed around yearly switches.
Research has shown that over half of British savers have little to no idea about the rates they are receiving on their ISAs. Many have developed a habit of leaving their ISAs unchanged for years, which is why bonus-led savings accounts have enabled banks to profit.
In an ideal world, the efforts of Which4U and others would change that overnight. But there’s the old adage that it takes just as long to break from an old pattern of behaviour as the old pattern lasted.
Therefore, as I’ve been tentatively arguing over recent weeks, it’s just as important to judge the value of an ISA beyond the initial 12 months.
Doing so goes against the grain. This is Money is backing the ISAs provided by Santander and Halifax. Yet, both the Halifax and Santander ISAs are almost isolated examples this year of what I’ve described as ‘the old order’; they begin to claw back their incentives immediately after 12 months.
As this chart demonstrates, on a single deposit of £5,340 their performance plummets immediately upon the bonus expiry. Customers will have to switch again next year before the returns completely degenerate.
And with so many Brits still apathetic to ISA rates, bonuses, and so forth, it seems folly to me to recommend ISAs based purely on their 12-month performance.
Beyond a Year: Consider Nationwide and Natwest
So, what are the other options for instant-access cash ISAs that might offer decent returns beyond 12 months?
For those unwilling to switch regularly, there’s the Nationwide’s e-ISA, which does allow transfers and which maintains a strong rate (3.10%) for much longer. As the chart above shows, with all else remaining equal, the Nationwide e-ISA outperforms the Halifax ISA in year one, and only takes one further month to outperform the Santander ISA.
The Nationwide e-ISA does require a current account. And this is a field that should be dominated by Santander’s outstanding 123 current account. However, the Nationwide Flexaccount allows access to the society’s outstanding ‘Select’ credit card, showing how the battle between these two giants extends well beyond the current parameters.
The lowest tier of the Natwest e-ISA matches the Halifax at 3% across the first year, and then maintains a solid 2% as the Halifax’s rate crumbles. You’ll miss out on a prize draw, but an extra 1.75% in interest across the second year might just make up for that.
Savers who reach £10,000, via transfer or deposits, will join the middle tier and nudge their rates up to 3.25%.
Those with large existing ISA savings of £30,000, meanwhile, could earn 3.50% through Natwest’s e-ISA – the highest rate on the market.
It’s easy to make recommendations for ISAs based on bonus rates and the initial 12-month performance. But to better reflect the patterns of the average British saver, surely it’s useful to look beyond that to at least a two-year span as well.
Why not check out Which4U’s ISA listings today and consider what your best options might be. Then apply online!