ISA market hots up as deadline approaches
The end of the tax year is still over a month away, but new banks and building societies are starting to launch new cash ISA deals for those planning ahead – or those yet to use their 2008/09 allowance.
While historically low interest rates may have put some people off saving in cash, failing to use your ISA allowance is like giving money away to the taxman. According to uSwitch.com, savers are set to withdraw a total of £9.5 billion from cash ISAs this year – losing them £196 million of tax-free interest.
Once the deadline to use your 2008/09 ISA allowance (5 April 2009) passes, your right to save up to £3,600 tax-free will be lost forever. So, if you haven’t yet used your ISA allowance for the current tax year, then now is the time to do so.
The good news is that several big providers have launched new ISA deals that offer fairly competitive rates of interest - and also some interesting and flexible features. Halifax, for example, has brought out a new deal that offers the security of a fixed interest rate but at the same time allows you to make withdrawals.
There are two main types of cash ISA: fixed-rate and variable-rate. The former offers a fixed interest rate for a set period – normally between 12 months and three years – but you will be penalised for early access. With variable-rate ISAs, the interest could decrease but you’ll be able to make withdrawals.
If you already have a cash ISA from a previous tax year earning a low rate of interest, then you may want to find a new account that accepts transfers. This will allow you to move your savings to a better-paying account without losing your tax status.
In the past few weeks several big providers have launched new ISA offerings.
Nationwide Building Society brought out a range of fixed-rate ISA bonds on 20 February, which range from one-year to three.
The longer you are prepared to lock away your money, the higher rate of interest you’ll earn. So, Nationwide’s one and two-year fixed-rate ISAs pay 3% AER, while its three-year account pays 3.25%.
Although you can open any of these accounts with an upfront deposit of just £1, remember that Nationwide could close the bonds at any time so it’s worth putting in as much money as you want to save when you open the account.
Nationwide does offer you the option to earn an income off your cash ISA by paying interest on a monthly, rather than annual, basis. However, bear in mind that if the interest is paid to you each month then you won’t benefit from compound interest, and the total interest you earn will fall.
Finally, Nationwide does not accept transfers – so you won’t be able to move previous tax year’s ISA savings into this account.
Halifax has also launched a new ISA product, called Direct Reward, which pays 3.00% AER for one year. You must make a minimum upfront deposit of £1,000 to open this account, and this balance must be at least maintained throughout the 12-month period.
However, unlike many fixed-rate ISAs, this deal allows you to make unlimited deposits (up to £3,600 for the tax year) and you can also make up to four withdrawals in the first 12 months.
Bear in mind, however, that once you withdraw money from an ISA you cannot re-deposit it.
Halifax also accepts transfers from old ISA funds, up to £39,600.
Another new launch is from Chelsea Building Society. It offers two cash ISAs; the first pays 3% AER but can only be managed by post, while the other pays 2% but can be accessed via branches.
To benefit from the 3% offered by Chelsea’s Postal ISA you must deposit at least £6,000 upfront. Therefore, this deal is only for people who have savings in previous ISAs to transfer, as your annual ISA allowance is only £3,600.
If you have less to save, then you’ll only earn 2.6% on this account. You should also bear in mind that the interest on these deals is variable – therefore, the rate could decrease over time in-line with the Bank of England base rate.
How do they compare?
Within the fixed-rate ISA offerings currently on the market, Halifax comes out top with its four-year fixed-rate ISA offering paying 3.3% AER on deposits of at least £500.
However, if you don’t fancy locking your money away over such a long time period, then you might be better off with Dunfermline Building Society's fixed-rate ISA, which pays 3.25% AER until 31 October 2010.
You need to deposit £100 to open this account and transfers are accepted. Withdrawals are also allowed but you will lose 180 days of interest as a result.
If you’re prepared to make regular payments into an ISA, then you should take a look at two offerings.
The first, from Saffron Building Society, is a monthly ISA that pays a fixed rate of 7% AER for one year. You’ll need £25 as an upfront deposit to open this account, and you must pay in between £25 and £300 a month in order to qualify for the rate.
Unfortunately, this ISA does not accept transfers for the first 12 months, so you won’t be able to earn 7% interest on ISA savings from previous tax years.
In addition, if you miss a monthly payment, you will be automatically moved into Saffron's Easy Access ISA – currently paying just 0.85%.
The second is First Direct’s regular saver ISA, which pays 7% AER fixed for 12 months. Like Saffron Building Society, you will need to put between £25 and £300 into this account each month. However, partial withdrawals are not permitted.
Again, transfers are not accepted and if you miss a payment you will see your money moved to a standard e-ISA paying 1.4% AER.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.