Best-buy cash ISA from Santander
Santander has kicked off the ISA season with the launch of a new cash ISA paying 3.5%.
Although this account has a variable rate of interest, savers will earn at least 3.5% for a year because Santander has a 12-month guarantee in place to pay 3% above the Bank of England base rate.
If the base rate increases during the 12-month period, then the interest rate will increase accordingly.
If you invested £3,600 (the current ISA allowance for people aged between 16 and 50) into this account, then you would earn a tax-free interest return of at least £126.00 over the year, according to price comparison website Moneynet.co.uk.
If you are over 50 and invest your maximum allowance (£5,100) then you would earn at least £178.50. Of course, if the base rate increases, then so will your return.
Santander also allows flexible access – so you can make withdrawals during the 12-month period without affecting your interest rate. Bear in mind, however, that if you take money out of any cash ISA this still counts towards your annual ISA allowance.
The account can be opened with an initial deposit of just £1. However, the catch is that transfers are not permitted - so if you’ve got ISA savings from previous tax years, you’ll need to either keep these where they are or look for a different account.
That aside, this account looks attractive compared to other deals currently on the market.
The best one-year fixed-rate cash ISA currently on the market is offered by Bank of Cyprus UK and pays 3.3% on deposits from £1. Transfers are allowed, but further deposits and withdrawals are not. In addition, even if the base rate does increase in the next 12 months, your interest rate will remain fixed.
In order to earn a higher rate of interest, you’ll have to opt for a longer fixed-rate period. M&S Money pays 4% AER on deposits from £500 for three years (transfers accepted) or Halifax pays 4.25% on deposits from £500 for four years (transfers accepted).
Nationwide recently launched a three-year fixed-rate cash ISA paying 4.4% AER on deposits from £1.
However, by opting for such a long term, you’ll forgo any access to your cash. In addition, with the base rate likely to rise next year, or possibly this year, you’ll miss out on the potential for better deals down the line.
In terms of variable-rate accounts, Santander’s new cash ISA comes out top.
Other best buys include a 120-day notice account from Newcastle Building Society, which pays 3% AER on deposits from £500. Transfers are permitted.
The best instant access ISA is from First Direct; this actually has a fixed rate of 2.75% until 31 August 2011 on deposits from £1. Again, transfers are permitted.
Santander’s new ISA hopefully marks the beginning of the ISA season, as providers try to tempt savings into using their ISA allowances before the end of the tax year.
“Savers have really been under the cosh over the last 18 months, having to contend with poor rates and soaring inflation, so let’s hope this attractive deal spurs other ISA providers to retaliate,” says Andrew Hagger, spokesman for Moneynet.co.uk.
“This account is likely to prove popular and if previous ISA seasons are anything to go buy, it may not be around for long.”
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.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
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.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).