Savers should check the interest rate paid on their Individual Savings Accounts (ISAs) to avoid being caught out by bonus introductory offers.
Generally speaking, the best ISA rates available on today’s savings market come with a catch – the high rates on offer are likely to fall after 12 months.
This is due to providers offering bonus rates in order to attract more custom. However, once the bonus rate expires, the level of interest paid on your savings is likely to fall significantly, leaving you earning less than you could be elsewhere.
A report from the Office of Fair Trading found that just 11% of savers that hold an ISA will switch to a new provider each year.
Tax-free ISA savings accounts were first introduced in the UK 12 years ago as an incentive to encourage people to save. According to the latest figures, 17.5m people in the UK currently hold around £143bn in cash Isas.
ISA activity usually picks up around the end/start of every tax year (April 5th/6th) so competition is heightened in an effort to draw in new savers.
In April, the annual ISA limit rose from the previous level of £10,200 to £10,680 which mean savers can deposit up to £5,340 into cash ISAs and the remainder into stocks and shares ISAs or up to the full amount into a stocks and shares ISA.
Savers who currently have a cash ISA, or who are planning on opening one are being urged to check the interest rates offered and be aware of when they will fall so the account can be switched.
Fixed Rate Bonds
Meanwhile, those who are prepared to lock their funds away for an extended period of time are getting the best interest rates offered for over a year, according to Moneyfacts.
The financial information service has said that rates offered on relatively short-term fixed rate bonds have been on the rise since August last year.
The average interest rate for a one year bond I currently 2.85%, the highest level since March 2010.
This follows a rate of 3.42% offered on the average two year bond, 3.7% for 3 year bonds and 4.1% offered on 5 year bonds.
However, savers must be sure that they are happy with losing access to their funds for the agreed fixed duration, as requiring early access would result in a hefty penalty.