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:

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:

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!

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