Avoid these four awful ISA traps
ISAs offer a tax-free return on your savings. But if you fall for one of these traps, you may not get as much as you think!
As ISA season heads towards its climax, many of us are now thinking about the best new homes for our tax-free savings stash.
But before you sign up to a new account, make sure you aren’t exposing yourself to any of these sneaky ISA traps.
Bonus rates
It’s not just ISAs that are guilty of this – easy access accounts are shocking for relying on bonus rates to entice savers in too. And it’s a potentially very costly trap to fall for.
Here’s the trouble. You open an ISA, tempted by its lovely big rate. However, you don’t notice that the rate is boosted by a whopping great ‘bonus’ rate that only last for 12 months. A year down the line, the rate of interest on your cash may drop off massively, without you realising. And if you’re not the sort of person to search around for a new home for your cash each year, that could end up costing you a lot in interest.
For example, the top rate you can earn on an 18-month ISA at the moment is 3.5% from the Cheshire Building Society Direct Cash ISA. Yet that rate includes a 2.5% bonus until September next year!
Variable rates
This is another naughty trick. The ISA rules state that you are only allowed to open one new Cash ISA each year. Once you’ve made your choice, you are stuck with it.
But you may not get the rate you think you will for the full year. That’s because many ISAs only offer a variable rate of interest, giving the provider the option to cut that rate at any time, for any reason.
Let’s take an example. Principality Building Society is trumpeting a rate of 3.1% variable on its e-ISA Issue 3, including a 1.3% bonus for 12 months. There’s nothing to stop Principality cutting that rate all the way down to 1.3% - it can’t ignore the bonus of course - within a couple of months, leaving you with a return nowhere near as impressive as you’d been expecting.
That’s not to say that Principality, or any other provider for that matter, will actually do that. But it’s an element of uncertainty I could do without when it comes to my savings. That’s why I stick to ISAs offering a fixed rate of interest for the term.
ISA transfers
One thing that can really prevent savers from moving between ISAs is the sheer palaver involved in transferring your cash into a new ISA.
It’s not as simple as just opening the new ISA then moving the cash over electronically, as is the case with normal savings accounts.
Nor can you simply withdraw the money manually and then deposit it into the new ISA as the money loses its tax-free status.
Instead you have to deal with forms, and wait for the two banks involved to sort the move out themselves.
As we highlighted in ISA transfers are getting easier, last year banks managed to complete 93% of transfers within the 15-day target set out by the Office of Fair Trading back in 2010. And while it’s great that so many are hitting the target, moving money from one financial institution to another in a little over a fortnight doesn’t strike me as the most gruelling expectation.
Transferring money between ISAs should not only be quicker, it should be easier as well!
If you want to move your cash to a new ISA, check out Top Cash ISAs for transfers.
Moving between Cash and Stocks and Shares
ISAs come in two very distinct forms – Cash ISAs, where your money remains in cash, and Stocks and Shares ISAs, where your money is invested in the stock market.
And you can move your money from a Cash ISA into a Stocks and Shares one with complete ease. There’s no impact on your ISA allowance – the money is treated as if it has always been in the Stocks and Shares ISA.
However, you are not allowed to move your money the other way, from a Stocks and Shares ISA into a Cash ISA. This strikes me as more than a little daft, but it also presents a problem to savers.
Yes, you will likely get a better return in the long run by putting your money in the stock market. But think carefully before you decide exactly how much money to move over to your Stocks and Shares ISA – that money won’t be able to retrace its steps to the safety of a Cash ISA!
More on ISAs and savings:
Get a better rate on your savings by stashing your cash offshore
Santander Major ISA: Rory McIlroy can get you a better rate on your ISA!
Why ISA transfers are finally getting easier
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