Last-minute ISA deal turns up the heat
Barclays has launched a new cash ISA paying 3.61% AER, which trumps NatWest’s recently launched cash ISA and leads in the best-buy tables.
Unlike NatWest’s ISA, which pays 3.51% AER, Barclays’ offering is available to both new and existing customers and there is no requirement to take out another account with the bank. The Golden ISA pays a variable rate of interest of 3.61% AER and can be opened from as little as £1.
The rate includes a 12-month introductory bonus of 1%.
Unfortunately, Barclays’ account does not accept transfers of ISAs from previous tax years. Another downside is that interest is paid monthly – while this is good if you want to earn an income from your savings, it does mean you won’t benefit from compound interest. As such, the interest you’ll actually earn is 3.55%.
People yet to invest their £3,600 ISA allowance for the current tax year (2008/09) have until 5 April to do so because this allowance is lost forever.
Despite the tax benefit of ISAs, around 66% of savers don’t use their ISA allowance, according to research from savings bank Birmingham Midshires, This could be a costly mistake. By failing to use their ISA allowances, savers hand over an extra £100 million in unnecessary tax, research from Nationwide reveals.
Andy Gray, head of mortgages and savings at Barclays, says: “We would encourage customers who have not already subscribed to an ISA in the current tax year to apply as soon as possible so they do not miss out on their annual ISA allowance."
How does it compare?
|Provider & Account||AER||Are Transfers
|No||£1||Instant access||* Interest paid monthly
* Rate includes 1% bonus
* Existing customers only
Four-year Fixed Saver
|Yes||£500||By closure only||* No withdrawals or additional deposits are allowed during the four-year term|
|Manchester Building Society
|Yes||£1,000||Subject to 60 days' notice and 60 days' loss of interest||* Further deposits permitted until 30/04/09
* Rate fixed until 30/04/2012
|No||£500||Not permitted||* Further deposits permitted until 3/04/09
* Access by post or in branch only
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.