Personal Finance

Isa interest rates: don’t get caught out by falling returns

After years of interest rate misery this year’s budget seemed to deliver good news for savers.

Chancellor George Osborne announced a new ‘Super Isa’, which let you invest £15,000 tax free in cash or shares. But the good news has been eroded by the banks and building societies ever since.

When the Super ISAs launched on July 1 it was with much fanfare but fairly paltry interest rates – the best rate you could get was 2.75 per cent from Virgin Money, but you would have to lock your money away for five years.

Now the news is even grimmer: having got hold of savers’ cash, banks have been slashing their interest rates on non-fixed Isas, with many now earning barely a one per cent return. Since inflation is at 1.9 per cent, that means most people’s savings are shrinking in terms of spending power.

The problem is that the banks don’t want your money. In normal circumstances they need savings deposits to fund their lending, but at the moment they are either lending very little or are getting hold of cheaper cash from elsewhere. This means that they don’t want to pay you interest for cash they don’t need, so they cut rates to reduce the cost of the deposits they hold and to make themselves less attractive to new customers.

This rate cut doesn’t just affect people who opened a new Isa last month. You should check all your accounts and see what interest rate you are getting – if you have been hit by a rate cut you do have some options to escape the poor return.

If you have already opened a cash Isa this year you can move your money to a better paying account but there are strict rules you have to adhere to. You must transfer all the money in your existing Isa into your new one and close the old one as you are not allowed to be subscribed to more than one Cash Isa in a tax year.

If you want to move ISA money from previous tax years then it is easier. You don’t need to move the whole balance of an account or close it.

So, take a look at the interest rate you currently have on your ISAs and see if any of the current best buys would give you a better return.

If you are yet to open an Isa yet this tax year you are in a stronger position. Check what interest rate you are getting on your existing accounts and look to see if you could do better elsewhere.

For those of us who need instant access to our savings the best rate on offer is 1.55 per cent from Birmingham Midshires, but that includes a 12-month bonus rate of 1.05 per cent, so make sure you move your cash after a year. The other 0.5 per cent component of the rate is a flexible, so it could be cut at any time.

If you don’t need to access your cash in a hurry then Halifax pays 1.7 per cent fixed on its 18-month Isa. Deposit more than £5,000 and you can register for Halifax’s Savers Prize Draw, in which you could win up to £100,000 each month.

The best possible Isa rate now is 2.85 per cent from Leeds Building Society, but that is a five-year fixed bond and you will be penalised if you withdraw your cash before the five years are up – and if rates rise in that time you could be left behind.

Whatever you do though, think hard before withdrawing your money from an Isa. If you take it out it loses its tax-free status and will count towards your annual allowance if you put it into a new Isa.

If you want to move your money then use an Isa transfer form, which means the banks move the money for you and it retains its tax-free status.

Interest rates may be low on Isass but at least that money is shielded from the taxman and always will be even when rates start to rise.


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