Which ISA is the best for your cash?

Robert Powell looks at which ISA you should go for to get the best rate on your cash...

Last week we asked you a very simple question: should the cash ISA limit be increased?

The response was almost unanimous: a big yes.

One reader, jimgardner said that the limit should be increased because “ordinary savings accounts are pathetic and stocks and shares are too risky for the average saver”. Another reader, kellick_becki agreed, saying that upping the limit could “make ISAs a realistic alternative to pension pots”.

However Mike10613 was more sceptical, and said that “it would be better to scrap income tax on savings” as “ISAs tend to help a small section of society”.

So in light of this virtual consensus, I thought I’d take a look at the best cash ISAs currently waiting to take the rest of your annual limit’s stash.

Easy-access accounts

You can save up to £5,340 in a cash ISA, tax free, every year.

If you need instant access to your cash, here are the best accounts around at the moment:

Source: lovemoney.com ISA centre

So AA and ING Direct come up trumps for the top cash ISA rates. However, neither of these accounts allow transfers in from other ISAs. This means that your entire deposit will have to be cash from your annual allowance.

ISA regulations also mean that if you’ve already stashed money into a cash ISA since the turn of the tax year, you won’t be able to get hold of either of these top-paying accounts. This is because splitting one year’s allowance across several cash ISAs is not allowed.

It’s also worth keeping an eye on the bonus rates tagged onto easy-access ISAs. These usually fall away after 12 months, leaving you with a paltry return. Every account detailed above has a year-long bonus rate, with the exception of the ING account that just offers a 12-month ‘guaranteed rate’.

Needless to say, if you want to keep getting the best return on your cash, you need to keep switching.

Short-term accounts

You’ll get a better rate on your cash if you lock it away for a fixed term. Here are the best short-term fixed ISAs around:

Source: lovemoney.com ISA centre

Northern Rock leads the way for the one and two-year fixed term accounts with 3.75% and 3.35% E-ISA rates respectively. NatWest and RBS’s Preferential ISA comes in second for the two year accounts, followed by the 3.50% Halifax Fixed Saver ISA.

Now, all of the above accounts have a fairly hefty minimum deposit limit: the lowest is £500. However, all of the accounts allow transfers in, so you can shift over the balances from any ISA you opened earlier in previous years.

Longer term accounts

Predictably, the top interest rates are tagged to the longest term accounts. Here’s a rundown of the some of the best lengthy deals:

Source: lovemoney.com ISA centre 

As you can see, lock your cash away for a full five years and Halifax will hand you a 4.40% rate on their Saver Fixed Account. Again, the minimum deposit is £500 and you are allowed transfers in. Halifax also has the top four-year account, offering 4.30% on your savings.

Base rate rise

Now, a lengthy high(ish)-interest account may look like the best home for your cash. But before you commit for the long term, you should think hard about where you, and the economy, will be in 24 to 36 months' time.

On a basic level: will you need to get at the cash? Fixed term accounts come with hefty early-withdrawal fees, meaning that if you do take out any money before the term is through you’ll lose large chunks of interest.

It’s also worth having a think about future changes in the ISA market. The Bank of England base rate has been stuck at 0.5% for over two years now and granted, no-one really knows when it will budge, but when it does it’s likely that savings rates will start to improve. If you’ve already sealed away your cash for the long term, you could find yourself with a relatively rubbish rate in a pumped-up market.

ISA do’s and don’ts

Finally, here are a few ISA dos and don’ts that you should always abide by:

DO use your allowance

Allowances aren’t rolled over to following years, so you’ve got to use it, or you’ll lose it!

DO keep switching

If your rate drops off after a fixed term - switch! Loyalty doesn’t pay in the world of ISAs.

DON’T withdraw your cash.

Withdrawing your savings when making a transfer will see them lose their tax-free wrapper and be counted as part of your annual allowance. Instead, make sure you request a transfer form from your new ISA provider. This way, the shifted balance will not clog up your new deposit allowance.

DON’T try and split your allowance

As I mentioned earlier, you’re not allowed to split one year’s allowance across several cash ISAs. The exception to this is if you go for both a cash ISA and a stocks and shares ISA (which are granted an additional allowance). Read Savers turn to stocks and shares ISAs to find out more.

DON’T wait until the last minute

The so-called ISA season kicks in around the end of March and beginning of April as everyone scrambles to use up their allowance. But why wait until the last minute? Open an account now and get saving straight away!

More: Compare ISAs with lovemoney.com | Save thousands using this new tax-free account | The best new short-term savings deals