ISAs for savers

Hilary Osborne explains why sheltering cash on deposit from the tax man can mean a much-welcome boost in interest

If you have money sitting in a savings account and don’t intend to use your ISA allowance to hold stocks and shares, it’s time to consider a cash ISA. While they don’t offer the potential for capital growth that should, in theory, make equities a better holding in the ISA wrapper, they do offer valuable benefits to tax-paying savers. “Savings rates aren’t massive at the moment so if you can increase them by keeping the tax that’s worth doing,” says Sue Hannums, savings manager at IFA Chase de Vere Financial Services. “If you are looking to save it is the first place to think about.”

Points of interest

Rates on cash ISAs have improved over the past 12 months. At the end of November 2003, the best buy instant-access mini cash ISA for balances of £1,000 was offered by Intelligent Finance and paid a rate of 4.35 per cent. In January 2005 the best-buy equivalent – Abbey’s Postal ISA – paid a rate of 5.35 per cent. Savers with £3,000 to invest who were willing to lock it away for five years could have received 5.20 per cent from Norwich & Peterborough Building Society at the end of November 2003; in January 2005 they could earn 5.70 per cent with the Halifax’s five-year fixed rate ISA.

The rates still aren’t incredible, but when you factor in the tax breaks associated with the ISA wrapper they look better. To a basic-rate taxpayer the 5.65 per cent available on Lambeth Building Society’s 45-day notice cash ISA is equal to 7.06 per cent earned on a taxed account. To a higher-rate taxpayer it is equal to 9.42 per cent gross – this compares well with the 5.14 per cent available on Scottish Widow’s 60-day notice account, the equivalent best-buy available outside an ISA.

And rates tend to be more consistent than those offered outside the ISA wrapper, says Hannums. “Other savings accounts offered by banks and building societies can have rates of 0.1 per cent and then you’ve got the best buys,” she says. “On cash ISAs every provider seems to offer the base rate and above.”

Terms and conditions

Like savings accounts held outside an ISA wrapper, cash mini ISAs are subject to different terms and conditions. Some are notice accounts, other instant access, some offer introductory bonuses, others do not. To meet CAT standards a cash ISA must allow savers to withdraw their money within seven days or less and have a minimum transaction of £10. This means many of those on the market are not CAT marked, but they might better suit your needs.

Rate will probably be the key driver when you make your choice, and choosing the account offering the most interest is a reasonable strategy to take. “Moving your cash ISA is fairly easy these days so you could go for a good headline rate with short-term bonuses if you are happy to move it after the bonus has fallen off,” says Hannums. “For chasing the best rates you do have to be a bit savvy, though.” This is because some of the best rates come with notice periods. Lambeth’s 5.65 per cent for example includes a 0.5 per cent bonus which comes at a cost of 45-days’ notice. You will be able to move your ISA if you see better deals when the bonus-period ends, but you will need to give notice.

In demand

Timing is also important if you are planning to use up this year’s allowance before the end of the tax year. Providers offering particularly competitive rate have sometimes struggled to cope with the volume of applications. Abbey, for example, recently experienced problems keeping up with applications to it Postal ISA from savers who wanted to transfer existing ISA holdings. And last year Intelligent Finance set a deadline of 24 March for cash ISA applications in the 2003/04 tax year following unprecedented demand. If you have decided on a cash ISA and want to be sure you get the one you have chosen you would be wise not to leave your application to the final throes of the tax year.

TOISAs

The final TESSA matured on 5 April 2004 and investors were given up to six months to transfer their money into a new tax-free wrapper. The TESSA Only ISAs (TOISAs) offered by many providers are the same as their cash mini ISAs but some run separate TOISA products.

Only money that was originally paid into your TESSA can be paid into a TOISA so you cannot add to it. You can transfer between TOISAs but you cannot transfer the money into an ordinary cash ISA. If you have moved money from a matured TESSA into a TOISA in this tax year it will not have had any affect on your ISA limits.