Why ISA transfers are finally getting easier

The banks are getting better at transferring Cash ISAs from one bank to another, but further progress is still needed.

I think the biggest problem with Cash ISAs is that many accounts start out with excellent interest rates which then collapse after a year or two.

This is most likely to happen if an ISA comes with a bonus. As I write, the top instant access cash ISA on the market is Cheshire Building Society’s Direct Cash ISA (Issue 1). It pays 3.5% a year, which is a very attractive rate in the current environment. That rate, however, includes a fixed bonus of 2.5% until 30 September 2013.

Come September 2013, the rate will tumble down to 1% or even lower. That’s because the non-bonus part of the interest rate is variable, so Cheshire could cut it to 0.1% if it wished.

Once the bonus has gone, some savers will almost certainly leave their money in this ISA and get a rotten return on their cash. That’s great news for Cheshire as it’s then borrowing money at a very cheap rate from apathetic customers.

Of course, what savers should do is transfer their ISA cash to whatever ISA is paying the best rate in October 2013.

Trouble is, the process of transferring an ISA is trickier than you might expect, and can take far too long. Indeed the Office of Fair Trading (OFT) investigated this issue in 2010, and found that, on average, transfers took 26 days to be processed.

A new target for transfers

The OFT set a 15-day target for transfers in 2010, and we learned this month that progress has been made. Last year 93% of transfers were completed within the guideline of 15 working days. What's more, if delays did happen, providers were backdating interest payments to Day 16 of the transfer process or the date of the cheque - whichever was earlier.

So it’s good that things are moving in the right direction, but I can’t help thinking that 15 days still seems like a long time. And that means that savers can lose a fair bit of interest during the transfer process.

Apparently the problem is that many banks still transfer ISAs to new providers by sending a cheque rather than doing it electronically. Sigh.

Still, the good news is that all the large high street banks will be required to move cash ISAs electronically from 2013. So things are moving in the right direction.

And regardless of the problems, I’d still urge you to transfer your Cash ISAs when the interest rate tumbles. When you’ve worked hard to save up some money, it makes no sense to get a paltry rate of interest on your cash. If you want to find the top ISAs that accept transfers, read Top Cash ISAs for transfers.

One final point: when you want to transfer your ISA, don’t withdraw money from your account. If you do that, you’ll immediately lose all the tax benefits. Instead you must pick an account and then tell your new provider that you’d like to transfer an ISA from another bank to this new account. It’s up to your new provider to tell your existing provider.

Good luck with your transfers!

More: The UK’s best Cash ISAs  | How self-select stocks and shares ISAs work