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Keep your money from the taxman
By Sarah Coles
Cash individual savings accounts are by far the most popular of the ISA stable. Around 70% of all money in ISAs is currently saved in cash. There are two good reasons for this: they are the most straightforward and they are risk-free.
Cash ISAs are very much like normal savings accounts. You put money in, earn interest on it, and take it out when you like. The big advantage they hold over savings accounts, however, is that interest is paid tax-free. This can make a huge difference, especially to higher-rate taxpayers.
In return for the tax benefits, there are restrictions: you can only invest up to a certain amount each year (until 6 April this is £3,000, before rising to £3,600); they are only available to those aged 16 or over; and although you can take your money out whenever you want, you cannot top it up again once you've invested your allowance.
So it's worth regarding your ISA money as an emergency fund, so you give it the best chance to grow tax-free. If you have money in other savings accounts, turn to that first.
Because of their low-risk nature, cash ISAs suit cautious investors - those who are concerned about investments that can go down as well as up, and who would lose sleep if they thought they could lose money, even in the short term.
They also suit those who expect to need their cash back within five years. The experts recommend that you need longer than this if you want to invest in the stockmarket, as it takes time to ride out the market's short-term ups and downs.
Likewise, cash ISAs can be very useful if you're saving for something specific a year or two down the line, such as a house deposit or wedding. Having an incentive not to dip in could be just what you need to keep you focused on saving.
More flexibilityFrom this April, cash ISAs will also have more flexibility - it will be possible to transfer existing ones into a stocks and shares ISA without affecting that year's allowance. So if your circumstances change, you can afford to take more risk, or your time horizon extends, you can simply change your mind and switch into stocks and shares.
Their broad appeal, then, is that they are easy to understand. However, there are many different types of cash ISA, so you need to get to grips with how they differ before picking the right one for you.
The most common kind is the variable rate ISA, where the provider varies the rate according to Bank of England interest rates. As Moneywise went to press, the best variables were Scarborough Building Society at 6.3%; Icesave at 6.1%; Egg Cash ISA; Principality Building Society e-ISA; and Kent Reliance Direct Variable Rate Mini Cash ISA, all at 6.05%; and ING Direct Cash ISA at 6%.
That said, they may not pass on Bank of England interest rate rises in full, and may cut rates more than the Bank of England when there's a drop. Likewise, many that start off competitive will lose their lustre over time, so you need to review your rates regularly. However, there are some that show consistency. According to Moneyfacts.co.uk, the most consistent products over the past three years have been the Yorkshire Building Society e-ISA; Earl Shilton Building Society Mini Cash ISA; Halifax ISA Saver Direct; Kent Reliance Mini Cash ISA; Leek United Mini Cash ISA; and the Skipton Building Society Mini Cash ISA.
It also pays to be aware of bonuses, which may apply for the first three or six months. They make the headline rate look particularly attractive, but are decidedly less appealing when they drop away.
These accounts often top the best-buy tables, so it's easy to be seduced by them. Some people are happy to opt for a bonus and switch away when the bonus period ends. But many more will forget, and some accounts charge for switches, so any benefit you saw from the bonus can easily be eroded. As a result you need to take care when investing in this sort of ISA.
Another important feature is the notice period. While many ISAs do offer instant access to your money, you may find some of the better rates have a notice period of anything from seven days to five years. The 6.3% offered by Scarborough Building Society, for example, requires 30 days' notice.
Most notice accounts will let you waive the notice period, but you'll pay a penalty. For those with notice periods of less than 60 days, the penalty is usually the interest for a period equivalent to the notice period.
Checking the terms For longer notice accounts, you will lose up to 150 days' interest. It's therefore worth considering carefully whether a notice period suits you and would help you keep your hands off your savings, or whether you're likely to fall foul of the rules.
You will also come across ISAs with tiered rates, or which have high minimum investments and higher rates to reward savers who invest more. So, for example, the Scarborough Building Society's 30-day notice account with a rate of 6.3% and National Savings and Investments' Direct ISA with a rate of 6.05% both require minimum deposits of £1,000. If you have more than £1,000 to invest, therefore, it's definitely worth looking at whether you can get a better rate.
You also need to check the small print for other catches. Some will have conditions on the number or size of withdrawals you can make. Others don't allow additional payments, or will reduce your interest if you miss a payment on a regular savings account. Some will also charge a penalty when you eventually close the account.
You may decide these restrictions are worth living with in return for more interest, but it's important to be honest with yourself, because if they don't, you could end up losing any gains you make by having to pay harsh penalties.
One thing to look out for is whether your cash ISA is a stakeholder. If it is, it will have no charges, access will be within seven days with no penalty, and it will be able to accept a minimum deposit of £10 or less. Interest rates will also be guaranteed not to fall more than 1% below the Bank of England's base rate.
These basic minimum standards may set your mind at rest, but they won't guarantee a competitive deal. At the moment, the best rates are about 6%, whereas 1% below the Bank of England would be just 4.5%.
Once you've picked a rate, there's no guarantee it will remain competitive, but you can switch cash ISAs. First, you need to check that your new provider will accept transfers. Then contact your new provider - they'll get in touch with your current provider and arrange the transfer, which should be completed within a month.
You don't have to switch all your savings into one account, you can split them between two or more new ISAs. And of course, from April this year, you don't have to switch them into another cash ISA, but put them into a stocks and shares ISA instead. However, it's important not to encash your ISA then try to switch, as you'll lose your allowance.
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