The UK's worst cash ISAs

These 73 tax-free havens for your cash pay pathetic rates of interest!

When searching for superior savings accounts, it's crucial to look into these four factors:

  1. the interest rate paid (ideally, the higher, the better);
  2. whether interest is tiered (which means larger balances earn higher rates of interest);
  3. if the interest paid is taxable; and
  4. how easy it is to access your cash.

Generally speaking, to earn the highest rates of interest, you have to deposit large sums or lock away your money for an extended period of, say, one to five years. In effect, this is a trade-off -- in return for higher, fixed rates, you agree not to make any withdrawals during the fixed-rate period.

The best rainy-day funds

Of course, when looking for a home for your rainy-day or emergency fund, you don't want to lock up this cash inside a notice account. After all, what's the point of having 'crisis' funds if you can't access them when you need to? That's why I'd recommend keeping your emergency savings in a top-paying, easy access savings account.

What's more, depending on your personal tax rate, the taxman may run off with between a fifth (20%) and half (50%) of your pre-tax savings interest. This explains why I'm a huge fan of cash ISAs, the tax-free savings accounts open to all of UK residents aged 16 and over.

In the 2011/12 tax year (which ends on 5 April), you can deposit up to £5,340 into a cash ISA. Therefore, for a couple, this limit doubles to £10,680. After 6 April, the 2012/13 tax year kicks in and the cash ISA limit increases by £300 to £5,640.

By saving inside a cash ISA, rather than a taxable savings account, you can boost your after-tax interest by between 25% and 100% (all other things being equal). Furthermore, you are free to transfer money from bog-standard savings accounts into a cash ISA, as long as these transfers don't exceed the deposit ceiling for a cash ISA.

Britain's top tax haven

Since their launch in April 1999, ISAs have grown to be the UK's most popular tax haven, with more than 19 million Brits using these tax-free accounts.

Alas, millions of us have dumped money into cash ISAs and, instead of keeping an eye out for the best rates, have left our money to rot in inferior accounts. The good news is that it's a fairly simple process to transfer your cash from poorly performing accounts to cash ISAs paying top rates of interest.

No interest at all

To find out how low ISA interest rates can go, I checked the rates payable for ISAs on balances of £1+. The bad news is that I found no fewer than 38 cash ISAs that pay zero interest on £1. If you have small sums stored inside the following accounts, then I'd urge you to switch without delay:

Institution

ISA account name

Notice

period

AA

AA Internet Access ISA (Issue 2)

No notice

Aldermore

30 Day Notice Cash ISA Issue 2

30 days

Britannia

Limited Access Cash ISA

Instant

Buckinghamshire BS

30 Day Cash ISA Issue 2

30 days

Buckinghamshire BS

Gold Rush 120 Day Notice Cash ISA Issue 2

120 days

Chelsea BS

Over 50's Cash ISA (4th Issue)

Instant

City of Derry BS

Cash ISA

30 days

Clydesdale Bank

Cash ISA - 40 Day Notice

40 days

Darlington BS

Rolling Tracker Cash ISA 2 Limited Edition

Instant

Darlington BS

Rolling Tracker Cash ISA 3 Limited Edition

Instant

Dudley BS

Cash ISA

Instant

Furness BS

ISA 90 Issue 2

90 days

Hinckley & Rugby BS

120 Day Notice Cash ISA

120 days

Hinckley & Rugby BS

7 Day Notice Cash ISA

7 days

Ipswich BS

90 Day ISA

90 days

krbs

Branch 60 Day Notice ISA Issue 1

60 days

krbs

Internet 60 Day Notice ISA Issue 1

60 days

krbs

Postal 60 Day Notice ISA Issue 1

60 days

Manchester BS

Premier Instant ISA Issue 5

Instant

Mansfield BS

Cash ISA Monthly Income

30 days

Market Harborough BS

2011 Brighter ISA Issue 9

Instant

Market Harborough BS

Cash ISA 60

60 days

Marsden BS

Direct Cash ISA 30

30 days

National Counties BS

1st Issue 45 Day Cash ISA

45 days

Nationwide BS

75 Day ISA Issue 1

75 days

Nationwide BS

Champion ISA

60 days

Nationwide BS

Online ISA Issue 2

No notice

Newbury BS

Senior Monthly Cash ISA

Instant

Principality BS

Principality Promise ISA

30 days

SAGA

ISA Saver (Issue 3)

No notice

Sainsbury's Finance

Cash ISA

No notice

Shepshed BS

Bonus ISA

60 days

Shepshed BS

Postal ISA

No notice

Skipton BS

Online Super Cash ISA

No notice

Skipton BS

Super Cash ISA

No notice

Teachers BS

Cash ISA Notice 90

90 days

Tipton & Coseley BS

Premier ISA

No notice

Yorkshire Bank

Cash ISA - 40 Day Notice

40 days

Source: Moneyfacts

In fairness, there is one reason why some of these accounts pay no interest on low balances. For any interest to be paid, some accounts require a minimum balance of, say, £500. Below this threshold, the interest rate drops to zero.

Then again, my view is that to qualify as genuine savings accounts, accounts must pay interest on even the smallest balances. Therefore, the above 38 cash ISAs get a firm thumbs-down from me.

35 awful accounts

Digging deeper, I found another 35 cash ISAs that pay interest of below 1% a year on balances of £1 and upwards. What disappoints me is that so many of these inferior ISAs come from building societies, the traditional home for British savings since Victorian times. They are:

Institution

ISA account name

Yearly

interest

Notice

period

Dunfermline BS

Cash ISA Issue 3

0.10%

Instant

Dunfermline BS

Direct Cash ISA Issue 3

0.10%

No notice

Santander

Easy ISA

0.10%

Instant

Wesleyan Bank

Cash ISA

0.10%

No notice

Derbyshire BS

Cash ISA

0.25%

Instant

First Trust Bank (NI)

Cash ISA

0.25%

Instant

Nationwide BS

Instant Access ISA

0.25%

Instant

Newcastle BS

Nova ISA

0.30%

Instant

Norwich & Peterborough BS

Cash ISA

0.30%

Instant

Norwich & Peterborough BS

Gold Cash ISA

0.30%

Instant

Smile

Cash ISA

0.31%

No notice

Clydesdale Bank

Cash ISA

0.40%

Instant

Newcastle BS

Newcastle 30 days ISA

0.40%

30 days

Yorkshire Bank

Cash ISA

0.40%

Instant

Britannia

Cash ISA

0.50%

Instant

Cheshire BS

Cash ISA 3rd Issue

0.50%

Instant

Marsden BS

Cash ISA

0.50%

Instant

NatWest

Cash ISA

0.50%

Instant

Newcastle BS

Newcastle 55 ISA

0.50%

Instant

Northern Bank (NI)

Cash ISA

0.50%

No notice

Saffron BS

Reward Cash ISA (Issue 3)

0.50%

Instant

Santander

Direct ISA Issue 7

0.50%

Instant

Smile

Cash ISA

0.50%

No notice

The Co-operative Bank

Cash ISA

0.50%

No notice

Ulster Bank

Cash ISA

0.50%

Instant

Royal Bank of Scotland

Instant Access Cash ISA

0.55%

Instant

Melton Mowbray BS

Cash ISA Issue 2

0.60%

Instant

Principality BS

Cash ISA

0.60%

Instant

Triodos Bank

Cash ISA

0.65%

33 days

Barnsley BS

Falcon Cash ISA

0.70%

Instant

Cambridge BS

Cash Instant Access ISA

0.70%

Instant

Shepshed BS

Cash ISA

0.75%

60 days

Yorkshire BS

ISA Plus

0.80%

Instant

Selftrade

Cash ISA Issue 2

0.90%

No notice

Hanley Economic BS

Instant Access ISA

0.95%

Instant

Source: Moneyfacts

As you can see, these 35 cash ISAs pay tax-free interest of between 0.1% and 0.95% a year. According to Moneyfacts, the average no-notice savings account pays interest of 0.91% a year. Thus, even though they pay tax-free interest, almost all of the above ISAs will generate less interest than the typical taxable savings account.

Ditch and switch today

With the Consumer Prices Index (CPI) measure of inflation currently running at 4.8% a year, there isn't a single standard savings account that beats inflation for basic (20%), higher-rate (40%) or additional-rate (50%) taxpayers.

In fact, to keep up with the rising cost of living, the savings of a basic-rate taxpayer need to earn 6% a year before tax. For higher-rate taxpayers, this hurdle rises to 8% and, for taxpayers in the 50% bracket, this pre-tax interest rate is an impossible 9.6% a year. Given that the Bank of England's base rate is a mere 0.5% a year, these rates simply aren't achievable.

Nevertheless, please don't leave your savings gathering dust and shrinking in value inside sub-standard savings accounts. By ditching and switching (which involves a little bit of effort and paperwork), your hard-earned cash could be earning tax-free interest of between 3% and 4.5% a year in Best Buy cash ISAs!

More: Compare cash ISAs | Renting a car can be cheaper than buying | Your best broadband deals for 2012

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