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.”