Cash in on tax-free Isa savings

If you have saved the maximum allowance in cash Isas since they began back in 1999, you could now have amassed £31,200 plus interest. It really is important to watch the interest rate that you're getting on such a significant sum.

Finding the best deal

With each base-rate cut, savings providers are lowering rates by different amounts on each account. As a result, it is hard for savers to know where to move their money to get the best deal. The rate you receive will depend on the type of account you have. Cash Isas come in different types to suit all circumstances. If you're using your Isa pot as an emergency fund – say, as a fallback in case you lose your job – then you will be best off with an instant-access account. If you won't need to access the money for a few months, then notice accounts may be more suitable. And if you're saving for a specific event at some time in a couple of years or so, Isa bonds could be the way to go.

If you need instant access, then the top rate for new Isas, according to Moneyfacts.co.uk, on a minimum £1 deposit is 3.5 per cent from Standard Life Bank.

Marks & Spencer Money is offering 3.1 per cent for Isa transfers but this includes a 1 per cent introductory bonus that expires on 21 April 2010.

For fixed rates, the top rate on a minimum £500 is from Halifax and is a four-year bond at 4 per cent. Halifax also offers a three-year bond at 3.7 per cent.

Halifax, Standard Life Bank and Marks & Spencer Money accounts all accept Isa transfers.

Some people are happy to chase 'best buy' deals, constantly switching their money from one provider to another, but others would rather find an account paying a consistently good rate.

"Savers are really having a difficult time at the moment, particularly those that rely on the income from their savings as their main source of income," says Michelle Slade, analyst at Moneyfacts.co.uk. "With so many changes to rates happening in the market, it is difficult to know where to move your money to, as an account that tops the best-buy list one minute may see its rate greatly reduced the next."

Moneyfacts has produced some consistency tables that show the accounts that continue to pay a good rate of return. They may not be best-buy rates, but had you left your money with them for 18 or 36 months, you would have achieved the best rate of return.

"If you are happy constantly switching your money then you can get higher returns, but many savers don't have the time or inclination to keep moving accounts," says Ms Slade. "Once again, the percentage of accounts from building societies continues to increase, showing that savers shouldn't just look to the big banks for the best deals."

Transferring an Isa

You can switch money from any cash Isa provider to another provider any time you like. The catch is that not all providers will accept transfers in.

Before you transfer, you should also check for any penalties that your existing provider might apply. For example, some will dock you 30 days' interest on the account. That may not be such a big deal if you work out that you'll be much better off on the new higher interest rate. But higher penalties could reduce the advantage from transferring.

It's also important to get the process right. Never withdraw your money from the account when you wish to transfer it as you'll lose the tax benefits immediately and won't get them back. You must transfer directly from cash Isa to cash Isa.

Fortunately, your new provider will do the legwork for you. Once you've filled out a transfer form, your new provider can move the money over, keeping your tax benefits intact. Many Isas can be transferred within a few days, although it can take longer. Note that the Inland Revenue allows 30 days for your old provider to carry out the transfer from receiving instruction from the new provider, which can be a frustrating length of time to wait.

The current tax year's cash Isa must be moved whole – only Isas that you took out in past tax years can be split between different providers. Isa rules changed in April 2008 to allow investors to transfer existing mini cash Isas to stocks-and-shares Isas. The take-up was slow as many saw their cash Isas as a safe haven. However, because of falling Bank of England base rates, Hargreaves Lansdown reports that 28 per cent of clients are considering switching to a stocks-and-shares Isa in order to seek out a higher return. A popular choice right now is to invest in corporate bond funds as yields in excess of 6 per cent look increasingly attractive.

Transferring the contents of a cash Isa to a stocks-and-shares Isa is not for everyone, though. Once transferred, the money can't be moved back into a cash Isa. What's more, not all cash Isa investors will be happy with the risks of equity investing.

"We would point out to anyone thinking of transferring, that their capital is not guaranteed in a stocks-and-shares Isa and that transferring is definitely not suitable for everyone," says Ben Lundie, head of Vantage development at Hargreaves Lansdown. "We can see this trend continuing for some time as we head towards 0 per cent interest rates in the UK."

How safe is your cash Isa?

As someone who lost my cash Isa money when Icesave went bust in October 2008, I can tell you that claiming money back through the Financial Services Compensation Scheme (FSCS) is stressful. It is important to make sure that your savings don't exceed the £50,000 limit for compensation from the FSCS. While most cash Isa savers won't have £50,000 in their account, you also need to take into account any other pots of cash held with the same institution.

If you want ultimate security for your cash Isa then look to government-backed National Savings and Investments (NS&I) or Northern Rock. For instant access, NS&I’s Direct ISA offers 2.3 per cent interest while Northern Rock offers 1.75 per cent. Northern Rock also has fixed rates available at 3.5 per cent.

TABLE 1. Cash Isa: most consistent accounts over the past 18 months

TABLE 2. Cash Isa: most consistent accounts over the past 36 months