The new financial year started on April 5. Banks and building societies are now imploring us to plonk our hard-earned cash into tax-free savings accounts.

There, it will make more money for us and we won’t have to pay tax on the interest. But beware. All is not as it seems. When it comes to cash ISAs, it really is worth having a close look at the small print.

Moneyfacts, a financial data firm, has discovered that not one of the best-buy ISAs of the past eight years has maintained its high interest payouts. Banks have tempted savers with high rates, only to downgrade them a short time later.

The result? We have been denied millions of pounds in interest which can cancel out the advantages of the tax breaks cash ISAs offer.

“Just because an ISA was a best-buy when you opened the account does not mean the interest rate is going to be retained,” says Lisa Taylor of Moneyfacts.

So what should you do to make your money work for you? As always, the main message is to keep an eye on interest rates, on websites such as Moneyfacts.co.uk and moneysupermarket.com.

Savers should shop around

“At the height of the ISA season, all the banks and building societies will be offering marvellous deals. But watch out a couple of months later – check to see if they are passing on full base-rate increases,” says Lisa. 

And if they’re not, don’t let your money languish in a poorly paying ISA: switch it to an account paying a higher rate of interest. Do not, however, withdraw all the money in cash from your current ISA as you will lose your tax break.

Make sure the bank or building society you are switching to can set up a transfer for you. And remember, too, that if you decide to take some money out of your ISA, you won’t be able to pay any more back if you have reached your limit of £3,000 in deposits.

An ISA is still a sound investment

Choose the right account and an ISA is still a sound investment. Since they were introduced by the Government in 1999, more than 16 million of us have invested £125 billion in the schemes, with the cash ISA being the most popular and the simplest to set up.

Maxi ISAs

For those with more capital to play with, you can invest up to £7,000 in one maxi ISA that invests in stocks and shares.

Mini ISAs

Or you could take out two mini ISAs – £3,000 in a cash ISA and up to £4,000 in an equity ISA.

March 9, 2007


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