Cash Isas aren't always king

By CLARE HALL
Updated:

 

CASH ISAS are the savings success story of 2001 as savers shun stock market-linked investments. Sales of unit trust Isas slumped by up to 70% in the run-up to the end of the last tax year on 5 April - but demand for mini-cash Isas soared.

Nationwide's mini-Isa sales were 20% up on the same period last year and Halifax's have more than doubled since January.

It is easy to see why cash has become king. With the best cash Isas paying about 6.5% interest free of tax, savers realise they would be hard pushed to make higher returns from shares over the next few months as markets wobble.

Cash Isas allow anyone over 16 to tuck away up to £3,000 a year, but are they as good a deal as providers claim? Not necessarily, say the experts. They warn that headline-grabbing rates on offer before the end of the tax year are often cut a few months later. So unless savers are vigilant they could make less on their savings than they expected.

Graham Hooper of Chase de Vere in Bath, Somerset, says investors should be especially careful soon after the end of the tax year.

He says: 'Companies have what they term recruitment rates. In other words, these are mouth-watering rates offered at the year-end. But once they achieve their sale targets, they trim rates for the rest of the year.'

As an example, he points to Julian Hodge bank, which last week trimmed its cash Isa from a starry 6.6% to 6.25% - a deeper cut than the recent 0.25% reduction in base rate would have required.

'Savers cannot afford to rest easy once they've tracked down a good deal,' warns Hooper. 'They have to be ready to keep their money on the move.'

Graham Bates of Bates Investment Services in Leeds urges savers to learn from experience.

He says: 'Look what happened with Tessas. Providers offered great rates, took in the money and then dropped their rates, hoping that no one would notice. That pattern is repeating itself.'

To move cash to a better interest rate deal, just request an Isa transfer form from the provider and send it to the new one. The money must then be transferred electronically from one provider to another. Savers cannot cash-in plans themselves and pass on the money to a new Isa provider.

To illustrate the importance of keeping Isa money on the move, Financial Mail tracked down a list of the best buys two years ago, when cash Isas were launched. None of the providers in researcher Moneyfacts' 1999 best-buy table offers the top deals now.

In April 1999, when bank base rate was 5.25%, Norwich & Peterborough building society led the pack with 6.75% on its cash Isa. Close behind were Nationwide, Abbey National and Principality on 6.5%. Yorkshire and Universal paid 6.25%. Since then, Norwich & Peterborough has withdrawn its variable-rate cash Isa and now offers a fixed-rate product at 5.25%.

With bank base rate now at 5.5%, Nationwide's cash Isa pays 6.2%, Universal's 6.15% and Yorkshire's 6%. Abbey National's is only 5.8%. Only Principality building society has maintained a good deal, paying 6.45% on its cash Isa.

To be sure of the best deals, savers would need to switch to a different set of providers. Moneyfacts' best-buy cash Isas are from Northern Rock, Smile, Chelsea, Investec bank, Bradford and Bingley and Cheltenham and Gloucester.

Moneyfacts says: 'With base rate falling, savers must keep a watchful eye on what their mini-cash Isas are paying. Don't assume that the rate offered when you open an account will stay at the same level.'

When picking a new deal, watch out for notice periods. The best products are instant access, allowing money to be moved immediately. Others, such as Julian Hodge bank's variable cash Isa, require three months' notice.

To save investors from being stung by rate cuts and unfair small print, the Government introduced Cat marks for cost, access and terms. And to qualify, providers must offer accounts that never drop more than 2% below base rate and that have no handling charges.

Savers must also be able to open an account with only £10 and have access to the cash within seven working days. But schemes qualifying for the Cat standard are not necessarily the best. At present they need offer only 4.5% interest - 1% below base rate.

Use Cat standards as a guide rather than a rule. And remember that if you pick a mini-cash Isa it limits to £3,000 the amount that may be invested tax-free in share or bond market investments in the same tax year, rather than the maxi allowance of up to £7,000.

Gina Pearce, 30, bought her first Isa last week at the start of the new tax year. She chose Chelsea building society's mini-cash Isa after a long look at best-buy tables.

Gina, a telesales controller from Cheltenham, Gloucestershire, says: 'I chose Chelsea's Isa because as well as offering a top rate, it offers a penalty-free transfer. That means I can switch my money to a better deal if necessary.

'I intend to keep an eye on it and move when necessary. I don't want my savings to fall behind.'

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