The top 10 cash ISAs for 2011

Opening a cash ISA this year is a great way to give your savings a boost. Here, we have a look at 10 of the top paying cash ISAs on the market.

It’s a new year and that means you’ve probably made a few New Year resolutions – and perhaps one of them is to save more money.

The past few years have been pretty tough for savers. Rubbish savings rates have meant many of us simply feel there’s no point making the effort to put any money aside for a rainy day.

However, there is one way to earn a better rate of interest on your savings. And that’s by opening a cash ISA.

The great thing about cash ISAs is that they’re tax-free. So this means that, for once, the taxman can’t run off with any of your hard-earned cash.

At the moment, you can invest up to £5,100 in a cash ISA each tax year. However, from 6 April 2011, this will increase to £5,340 each tax year – and personally, I think this is well worth taking advantage of.

Of course, many of you may already have a cash ISA, but that shouldn’t stop you from hunting out a better rate of interest. Just bear in mind that some cash ISAs won’t allow you to transfer funds from an existing cash ISA, so make sure you check before applying.

So let’s take a look at some of the best cash ISAs on the market right now.

Best rates for instant access

The table below highlights five of the top paying instant access cash ISAs.

*Rate drops to 2.80% if not a Halifax current account holder.

As you can see, the most competitive interest rate comes from the Halifax Cash ISA Direct Reward which pays 3%. However, you will need to be a Halifax current account customer to qualify for this top rate – otherwise the rate drops to 2.80% (although this is still a competitive rate). And don’t forget that this interest rate is tax-free.

What’s more, you can transfer funds into the Halifax Cash ISA Direct Reward from an existing cash ISA and you’ll only need £1 to open the account. Just bear in mind that the interest rate drops significantly after the first year, so you will need to shop around for a more competitive deal.

If you're not a Halifax current account customer, however, and you don’t need to transfer funds in from an existing cash ISA, the Santander Flexible ISA is an alternative option as it offers an interest rate of 2.85%. This cash ISA is a little more interesting as it tracks 2.35% above the base rate - so although the interest rate is still variable, this should mean you’re continually getting a competitive rate of interest.

On the downside, the interest rate drops to a paltry 0.50% after the first year – so you’ll need to move your funds elsewhere once those 12 months are up.

Finally, don’t forget, to protect the tax-free status of your money, you should never withdraw cash from an ISA to invest in another account. Instead, you should ask your new provider for a form that will allow you to transfer the money directly to your new ISA.

Fixed rates

If you’re not planning to touch your funds for a while, you could consider a fixed rate cash ISA instead. The advantage of this is that the interest rate will remain fixed for the term of the ISA and in theory, the longer you lock up your funds, the higher the rate of interest should be.

The downside, of course, is that you won’t be able to get your hands on your cash for the term of the ISA bond.

One year

If you’d prefer to only lock up your funds for one year, the M&S Fixed Rate Saving Option Cash ISA offers an interest rate of 3%. You can transfer funds in from another cash ISA and you’ll need a deposit of at least £500.

Of course, it’s worth noting that the interest rate offered here isn’t any higher than that offered by the Halifax Cash ISA Direct Reward if you’re a Halifax current account customer. However, the rate on the M&S cash ISA is fixed for the first year so you won’t need to worry about it dropping during that period. 

Two years

If you’re happy to tie up your funds for an extra year, the best two year fixed rate cash ISA is the Bank of Cyprus Cash ISA Bond which pays an interest rate of 3.30%. You’ll need a minimum deposit of £1 and you can transfer funds in.

Three years

Alternatively, if you want to lock away your money for three years, the Bank of Cyprus comes up trumps again, offering an interest rate of 3.90% for its three year cash ISA bond. Again, you will need a minimum deposit of £1 and you can transfer funds in.

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Four and five years

Some of you may wish to tie up your funds for even longer. Personally, however, I would be reluctant to lock away my money for four or five years, simply because interest rates are likely to rise in the near future. As a result, what might seem like a competitive rate today is unlikely to be competitive a few years down the line.

However, if you are looking for a four year fixed rate cash ISA, the Halifax Fixed Rate ISA Saver offers an interest rate of 4.25% for four years. You’ll need a minimum deposit of £500 and you can transfer funds in from an existing cash ISA. Note, however, you can’t make any additional deposits once the account has been opened.

Unfortunately, if you’re after a five year cash ISA bond, the top paying cash ISA is actually offering a lower rate of interest than that offered by the four year ISA bond from Halifax. The Cambridge Building Society 5 Year Fixed Rate ISA pays an interest rate of 4.10% until 2 November 2015 - so that's 0.15% below the Halifax ISA Saver and I'm not sure it's worth bothering with.

Again, you’ll need a minimum deposit of £500 and you can transfer money in from an existing cash ISA. Once opened, however, you can only make additional deposits during the 2010/2011 tax year.

Of course, if you’re concerned about the fact that some of these fixed rate cash ISAs don’t allow you to make additional deposits after your initial one, you can open a separate cash ISA in the following tax year and put your ISA allowance in that one instead.

Happy saving!

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