Switch Isas when the teaser rate drops

Published by Mark King on 04 April 2014.
Last updated on 16 July 2014

Clock and coins

If you transferred money into a new cash Isa at the start of the last tax year (in April 2013), chances are your rate is about to drop as your introductory 12-month bonus is about to expire.

It's a ticking timebomb for many savers – and when the bomb explodes, they could easily find their income in tatters.

As part of our Beat The Banks campaign - running all year and designed to shift Britain's families from poor-paying savings accounts to better alternatives – we want to ensure no one in the above scenario loses out.

Cash Isas, savings accounts with extra tax benefits, are ultra-low risk. Unless the provider goes bust, your money is safe, and even then you will be protected by the Financial Services Compensation Scheme to the tune of £85,000 per person, per authorised firm.

Like other savings accounts, you can tie your money up for longer periods to earn a better rate, or you can choose one with easy access. What's more, you can invest up to £15,000 in the 2014/15 tax year.

Find the best cash Isa or savings account for you

Introductory bonuses

Like with other savings accounts, providers have in recent years been using introductory bonuses - also known as teaser rates – to attract customers. For example, when a provider advertises a rate of 3% but included in that rate is a first-year bonus of 1.5%. This means the actual rate savers receive will be cut in half after 12 months.

Providers hope large numbers of people either forget to withdraw their cash at that point or simply cannot be bothered.

Introductory saving rates can benefit some savers, mainly those who are more financially savvy and have a better understanding of savings products. But everyone else is at risk of losing out.

"Like all savings accounts, it's really important to keep an eye on the rate you are earning on your Isas, not just when you open them but also going forward," explains Anna Bowes of savingschampion.co.uk, which offers a Rate Tracker service that will notify you when any introductory bonus periods are due to end.

"This time of year is traditionally when you are likely to find the best rates available. So if the rate on your old Isa has been cut and become uncompetitive, look around to see if you can transfer somewhere better, although unfortunately not all the best rates will
accept transfers.

"Of course, always remember not to cash in an old Isa yourself. Fill in an application form with the new provider and it will arrange the transfer for you, otherwise you could end up losing that allowance for ever." The cumulative effect of building a larger proportion of your savings that remain out of reach of HM Revenue & Customs shouldn't be underestimated.

Isa benefits

Even though rates are poor at present (due in part to the impact of the Funding for Lending Scheme, when the government pumped cash into providers' coffers, meaning they didn't need to attract savers' money by offering decent rates), making use of a cash Isa is still a smart move and will pay dividends over the longer term – particularly when interest rates eventually pick up again in the future.

Which cash Isa should I choose?

Despite the low-interest-rate environment, it is still worth shopping around to get the best Isa rate. Hagger's picks include National Counties Building Society one-year Isa. He also likes Halifax's two-year fixed-rate Isa.

But Hagger says he would be "reluctant" to lock into anything longer than two years at the moment, as many experts are predicting the first interest rate rise for years in early 2015. "The only exception being the Coventry Building Society 2.75% deal for three years: this looks good value but be aware no transfer-in of previous Isa balances is permitted."

The tax advantages

Interest is paid tax-free on a cash Isa, whereas the interest paid on cash held in a normal savings account is subject to income tax. This means basic-rate taxpayers do not pay 20% of any interest to the government, higher-rate taxpayers save 40%, and additional-rate taxpayers save 45%.

Take an interest rate of 3% as an example. If you're a basic- rate taxpayer, you'll pay tax on your interest at 20%, so over the course of a year £1,000 in a traditional savings account will generate £24 of interest after £6 tax.

For a higher-rate taxpayer, paying tax on interest at 40%, the return will fall to £18. But hold your £1,000 in an Isa, and you'll receive the full £30.

Although this may only be a difference of a few pounds, over time this can seriously mount up. For instance, assuming interest rates remain at 3% and you don't add any more money to your account, in an Isa your £1,000 will have grown to £1,159 after five years.

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