Great news for your ISA

Transferring your cash ISA can be a long and arduous process, but it's about to get a whole lot easier.

Would you transfer your cash ISA if you knew there was a possibility your money could vanish for a month or two before eventually reappearing at its intended destination? Of course you wouldn’t. So it’s no surprise that horror stories like this about ISA transfers are putting savers off switching to the best tax-free deals.

Switching dilemma

But you’ll need to switch regularly if you want to guarantee you’ll keep on earning the best possible return on your savings. The trouble is you can’t simply withdraw money from one ISA and redeposit it in a new best-buy account. Once money is taken out of an ISA it immediately loses its tax-free status, and a further contribution will only use up more of your annual ISA allowance - assuming you have any left.

In other words, savers have no choice but to brave the transfer process if they want to move ISA money into a more competitive home, and retain the tax breaks. And that means braving those horror stories.

Super complaint

But all this is set to change because the transfer process is at last being kicked into touch following a super complaint from fair deal campaigners, Consumer Focus.  

As well as highlighting the inefficiencies in transferring cash ISAs from one provider to another, the consumer champion also expressed concerns that bureaucratic rules were preventing transfers into some of the most attractive ISA accounts. Additionally, the transparency of interest rates and introductory bonuses were also called into question.

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Transfer times

In response to the super complaint, the Office of Fair Trading (OFT) looked into the ISA industry. It found that, at the moment the average transfer takes 26 calendar days to complete, while a quarter of transfers take a month.

This week, it announced new guidelines which will mean the maximum length of time it should take to complete a transfer is significantly reduced from the current 23 working days down to 15. This new timescale will come into effect on 31 December 2010, and should mean we see the end of an unnecessarily long and drawn out switching process.  

On top of that, in the event that an ISA provider is unable to complete a transfer within the 15 working day timeframe, they must ensure the saver is no worse off than they would have been if the guidelines had been met. This means savers should begin to earn interest no later than 15 working days after requesting the transfer regardless of whether it has been completed or not.

It’s true the new guidelines are voluntary, but ISA providers will be under more pressure than ever to act efficiently. Consumer Focus estimates that cutting transfer times will save UK savers up to £14.5 million. Better still, the OFT has recommended that interest should be paid throughout the transfer process, but as yet the banks are under no obligation to do so. That said, some are already backdating interest to the time the first ISA account is closed. Let’s hope this is the shape of things to come.

Where should you transfer to?

These guidelines are certainly a step in the right direction. If you’d like to switch your old ISA accounts to improve your return, you should bear in mind not all ISA accounts accept transfers. But the best-buys included in the table below will definitely do so:

Top six cash ISA transfers (instant access)

Today, the most competitive rates for ISA transfers are offered by the Santander Direct ISA and the Nationwide e-ISA at 2.75%. The Santander Direct ISA includes a large introductory bonus of 2.25% for a year, and requires a minimum transfer amount of £9,000 to qualify for the 2.75% rate.

Recent question on this topic

• toyraman asks:

  How does ISA transfer work and If the bank offers a good rate on transfers how do they make their profit?

  • 
    manzanilla answered "You find an ISA you want to move funds to - you complete the pplication form with that bank, giving..."
  • 
    MikeGG1 answered "They can offer good rates because they are lending at higher rates and also because they pay..."
  • Read more answers

Meanwhile, the Nationwide e-ISA offers a much lower bonus of 1% until 30 June 2011, but requires a minimum deposit of just £1, making it suitable for savers with smaller sums. Both accounts offer penalty-free withdrawals when the time comes to draw on your savings.

You should note that to qualify for the Nationwide e-ISA you must also have a Nationwide card account such as the Flex Account (a current account), CashBuilder card (a card based savings account), or InvestDirect (an instant access savings account).

The ISAs shown above all offer penalty-free access with the exception of the Halifax ISA Direct Reward. With this account you’ll get up to four withdrawals during the 12 month reward period. If you make more than four withdrawals, the rate you’ll earn will drop to the Halifax ISA Saver Direct rate which is currently just 0.50%.

Interest rates and introductory bonuses

Finally, in addition to criticising transfer times, Consumer Focus also complained about the lack of transparency over interest rates, and temporary bonus rates which tempt savers in but revert to a dismal return once the introductory period has come to an end.

At present, most savers are notified when the bonus has disappeared, or when there has been an adverse change in the interest rate. But there’s no requirement to include this information on annual ISA statements. From early 2012, this will change so that latest rate must be clearly published. This should serve as a timely reminder to check whether your rate is still competitive, particularly once the bonus has disappeared.

Compare cash ISAs at lovemoney.com

More: Cash ISAs are back on top! | Rates on cash ISAs rise