Top 10 cash ISAs for the new tax year

Well, the ISA season has been and gone and, if you didn’t fund your ISA by the end of Easter Monday, that’s last year’s tax allowance lost for good. You can’t get it back so there’s no point worrying about it if you missed out.

But that doesn’t mean you can’t get an ISA now. In fact, if you did apply too late or forgot to get around to it, don’t worry, as you can get in early this time around.

Indeed ISAs are not suddenly less appealing now the financial world and his wife have stopped harping on about them.

They still offer the same tax-free wrapper on your savings and investments, allowing you to maximise your money at a time when savers need all the help they can get.

And even better, as of Tuesday 6th April we all got a brand new tax allowance for the 2010/2011 tax year - and it’s bigger and better than last year’s.

Make it count

This year you have a total ISA allowance of £10,200, and there’s a number of ways you can use it.

You put the entire £10,200 allowance in a stocks & shares ISA. Alternatively, you could put up to £5,100 into a Cash ISA, and the rest in stocks & shares if you wish.

If you only put say, £3,000 into a Cash ISA that leaves £7,200 available to put in a stocks & shares ISA too.

Plus remember, you are free to transfer your existing ISA funds to another provider if you feel they are offering a better deal than the one you’re currently getting.

This could be a great idea, for example, if you previously took out a Cash ISA that included a bonus rate. If that bonus period has now ended, your interest rate could have fallen significantly, and you might be able to find a better home for your existing tax-free savings. Just check with any potential provider that you are allowed to make transfers in. Not all will let you, as I explain later.

The other benefit of opening this year’s ISA now is that you get a whole extra year’s worth of tax-free benefits. So why on earth wait until the deadline to start saving? Not only can it be stressful trying to open new accounts when you are up against it, but you will also miss out on months and months of tax-free interest by holding off.

Indeed, recent research from Yorkshire Bank has shown that delaying using the new cash ISA allowance could potentially cost UK savers a total of £25m each and every day in lost interest.  And this includes over £5m a day of tax-free interest!  

The bank also found that one in five were unaware they could make small and regular savings in ISAs rather than lump sums.  This is another big benefit of starting early rather than waiting until next March or April. After all, we don’t all have thousands lying around waiting to be deposited into an account, but if you open an ISA early you can drip-feed money in over the course of the year.

Is it worth it?

You may have read about the recent super-complaint made by consumer champion Consumer Focus to the Office of Fair Trading regarding Cash ISAs. If not take a look at Jane Baker’s The billion pound ISA rip-off.

The organisation claims that providers are tempting savers with teaser rates that then reduce significantly a year down the line. If you already save into ISAs you will be well aware of these sneaky bonus rates.

Plus it says it is sometimes difficult to switch to a better deal, or savers are afraid of doing so because it can prove a slow process during which they will often lose interest - another problem many lovemoney.com readers are all too aware of.

Consumer Focus argues that this isn’t fair because ISAs were launched as a long-term savings vehicle, but the short-term nature of headline rates means that savers actually earn very little on their money unless they regularly switch. Just what they don’t want to do!

• Watch our Three tips for opening your first ISA video.

In fact, the average rate of interest paid to Cash ISA savers - which is 0.41% - is far lower than advertised headline rates. And it notes that the best accounts will not accept transfers in. This is true of the top two current cash ISAs - see table below.

Consumer Focus is calling for the Office of Fair Trading to explore the case for an automatic transfer in circumstances where an old account is effectively replaced by another one with the same key features paying a higher interest rate.