Get the best cash ISA of the year!

You'd be mad to miss out on this great cash ISA!

If there’s one financial product I really like, it’s cash ISAs. And why? Well, it’s all to do with the fact that cash ISAs are tax-free. So, for once, the taxman can’t get his grubby mitts all over your hard-earned cash. And as a result, I think you’d be mad not to have one!

Cash ISAs come in all shapes and sizes. So whether you’d prefer to be able to access your savings penalty-free or you’d rather tie up your savings for a year or more, there’s bound to be a cash ISA out there for you.

You can invest up to £5,100 in a cash ISA each tax year – although this limit is rising to £5,340 on 6 April. So if you opened a cash ISA today and invested your full £5,100, you would be able to invest a further £5,340 on 6 April.

Of course, you don’t have to invest the full amount in one go. You can deposit any amount (up to your allowance) throughout the tax-year and many cash ISAs allow you to open them with just £1.

The best cash ISA in town

Although interest rates on cash ISAs, just like all savings accounts, have plummeted over the past few years, investing in an ISA is well worth doing. And right now, I think the best offering you will find is the Halifax ISA Direct Reward which pays an interest rate of 3%.

Now, 3% might not sound a lot, but don’t forget, this is tax-free. A standard savings account paying 3% before tax would actually work out to be 2.40% for a basic taxpayer and just 1.80% for a higher rate taxpayer. So suddenly, 3% tax-free doesn’t look quite so bad!

However, there is, of course, a catch. In order to qualify for the full 3%, you need to have a current account with Halifax. If you don’t, the rate drops to 2.80%. But don’t despair too much because this is still pretty competitive.

In fact, the only easy access cash ISA paying anything higher than 2.80% is the Santander Flexible ISA which pays 2.85%. But given how much lovemoney.com readers have complained about Santander’s poor customer service, I think you’re probably better off sticking with Halifax!

It is possible to find a higher rate of interest if you go down the fixed ISA bond route. But in order to beat 3%, you’ll need to tie up your funds for two years or more and personally, I’m not sure it’s worth it – particularly not if interest rates rise in the near future. Find out more in The top 10 cash ISAs for 2011.

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The pros

Another advantage of the Halifax ISA Direct Reward is that it allows transfers in. This means that if you already have a cash ISA but you’re after a better interest rate, you can transfer your money across (this won’t be included as part of your ISA allowance).

Bear in mind if you’re going to do this, 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.

The Santander Flexible ISA, on the other hand, does not allow transfers in - so this is only available to those of you looking to open a brand new ISA with fresh funds.

You can open the Halifax ISA Direct Reward with just £1 and you can make as many withdrawals as you wish. Just bear in mind, if you withdraw any money from your ISA, you won’t be able to replace it. If you deposit the full £5,100 and then withdraw some of it, you won’t be able to make further deposits until the new tax year starts – even if you only want to replace the amount you withdrew.

The cons

The major drawback to the Halifax ISA Direct Reward is that its great rate of interest only lasts for one year. After that period, if you have a balance of between £1 and £20,999 the rate falls to 0.10%, for funds between £21,000 and £26,999 the rate falls to 0.13% and for funds over £27,000 the rate falls to 0.20%. Pretty rubbish, right? So that means you’ll have to go through the process of moving your funds to a new cash ISA in a year’s time.

Unfortunately, however, this is a common theme for most savings accounts these days. For example, the Santander Flexible ISA also drops to 0.50% after the first year. So you’ll need to make a note in your diary to remind yourself to get switching as soon as the rate drops.

Further benefits

I mentioned earlier that the only way to receive the top paying rate of 3% with the Halifax ISA Direct Reward is by having a current account with Halifax. While this might sound like another drawback, it doesn’t have to be. That’s because if you apply for the Halifax Reward Current Account, you’ll receive £5 every month you pay £1,000 into the account – whether you’re in credit or overdrawn!

So this is actually a pretty decent current account to own. You can find out more in Earn £60 a year from an empty current account.

What’s more, if you have this current account, you’ll also be able to apply for the Halifax Web Saver Extra and earn 2.70% - instead of the standard 2.50% that non-Halifax current account customers will receive. Right now, the top paying easy access savings account is the Post Office Online Saver, offering an interest rate of 2.90%, so the Halifax account isn’t far behind.

In addition to that, you’ll also be able to apply for the Halifax Credit Card which offers 12 months interest-free on purchases to all current account holders. This isn’t quite as competitive as the Tesco Clubcard Credit Card which offers 13 months interest-free on all purchases, but it’s not bad!

Finally, you can also apply for the Halifax Rewards Clarity Credit Card if you have a Halifax current account. There are no usage fees with this card – so you won’t be charged a fee to transfer a balance, withdraw cash (note, you will still be charged interest at 12.9% from the date the withdrawal is made) or use your card abroad! Brilliant!

What’s more, if you spend £300 on the card in a month, you’ll receive £5 cashback. The card charges an interest rate of 12.9% however you use it, so if you are spending on the card, make sure you pay off your balance in full each month to avoid paying interest.

So, as you can see, applying for a Halifax current account has lots of other benefits too. And most importantly, you’ll be able to apply for what I consider to be the best cash ISA of the year!

More: The best savings accounts for 2011 | The biggest regrets in 2011