The billion pound ISA rip-off

Best buy cash ISAs are often here today, gone tomorrow. This practice hasn't gone unnoticed with a super complaint issued to the OFT today.

Today fair deal campaigner, Consumer Focus has issued a super complaint to the Office of Fair Trading about the Cash ISA market. The organisation estimates up to 15 million savers could be losing around £3 billion in interest every year because of unfair practices, such as slow transfers, confusing product names and 'bait pricing'.

'Bait pricing’ means luring new customers in with an impressive but temporary headline rate that later lapses into an uncompetitive account. In fact, Consumer Focus claims the average ISA now pays less than half a percent! Considering the best ISAs currently pay around 3%, this means most of us are getting ripped off by ISA providers. And because it takes so long - and is so confusing - few of us end up switching accounts.

Let’s hope the OFT takes the super-complaint seriously, and the ISA industry starts to clean up its act. But in the meantime, what can you do to ensure you get a good deal?

Recent question on this topic

• poppy27 asks:

  I have requested to transfer my ISA to a better rate within the same bank - can I get my interest recalculated on this new rate and paid this year?

  • 
    manzanilla answered "You should get the new rate paid from the date you transfer. You should see a closing calculation..."
  • 
    MikeGG1 answered "Interest is calculated on a daily basis within each contract.  The new basis is never..."
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The odds may be stacked against you, and there's certainly no way you can guarantee the best buy rate you’re earning today will stay competitive.

But you can protect your return by trying out one of these three methods:

1. Choose an ISA with consistent returns instead

One option is to choose a Cash ISA with a consistently competitive return, rather than a best-buy. The most consistent accounts often don’t pay the highest headline rates. In fact, you may never come across them in the best-buy tables. Nevertheless, these accounts have been shown to consistently pay good returns by maintaining decent rates over the longer term.

Putting it another way, a consistent ISA is likely to pay more interest in total over a set period than a best buy with an attractive headline rate which rapidly disappears.  

In a moment we’ll take a look at the most consistent ISAs. But first, you should remember two things: A best buy ISA may also offer a consistent return. Although it’s unusual, the two aren’t mutually exclusive. And second, consistent ISAs don’t offer any guarantees. An account may have a good track record for offering a competitive return in the past, but that doesn’t necessarily mean it will stay that way in the future.

That said, I still think choosing an ISA with a reputation for consistency may be a better solution than choosing a best buy with a rate that could drop away. Here is a selection of the top six:

Top six most consistent Cash ISAs (over 18 months)

The current best buy easy access Cash ISA offers a rate of 3.20%. So you can see, while all the accounts shown in the table above have paid consistently good returns over the last 18 months, there’s still a significant margin between the rates currently on offer and the best buy rate.

But don’t let that put you off. Remember there’s more to a decent return than a high initial rate, especially if you're not prepared to switch every year.

Having said that, the most consistent ISA - the Standard Life Direct Access ISA - offers both a consistent return and a pretty competitive rate today. This account certainly seems to have it all.

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2. Keep on switching

Choosing a consistent ISA means you don’t have to watch your savings like a hawk in quite the same way as you would with a best-buy. But there’s absolutely nothing wrong with choosing an account with a top rate, as long as you’re prepared to keep a close eye on it, and transfer it whenever it starts to fall behind.

This doesn’t have to be the onerous task it seems. After all, best buy tables are widely available such as this one from lovemoney.com partner, Moneyfacts. Surely, you can spare two minutes every now and then to check it?

If you can handle that, here’s a selection of the latest easy access Cash ISAs which offer the very best rates today:

Today’s best buy easy access Cash ISAs

Just remember things do change quickly in the ISA market. The original Flexible ISA from Santander has recently been withdrawn. This account offered a top rate of 3.50%, guaranteed to remain at least 3% above the base rate for a year.

But the new version offers a lower rate of 3.20%, this time with a 12-month guarantee to beat the base rate by 2.70%. The account is still the market-leader, but perhaps you should get in quick before it changes again. After all, the rate promises a guaranteed minimum which provides a degree consistency for the next year at least.

• Watch our 3 tips when opening your first ISA video.

3. Go for a fixed rate ISA

If you don’t need access to your cash, another way to guarantee your return is to choose a fixed rate ISA. The rates on offer are often higher than easy access ISAs, particularly if you fix for the longer term.

That said, these accounts can’t promise to stay competitive. If the rates available on variable ISAs start to climb, your fixed rate could fall behind. But if you’re prepared to take a gamble, here are some top deals:

If you want to go the whole hog and fix your rate for five years, you can earn a great return from the Leeds Building Society 5 Year Fixed Rate ISA. Find out more in Earn 4.6% on your savings tax free! You can even access 25% of your capital without penalty.

But if that sounds like too much commitment, you can earn a fixed rate of 3.25% until May 2011 with the CallSave 1 Year Fixed Rate ISA from Coventry Building Society. Note this account is for the new 2010/2011 tax year (which starts on 6 April), and requires a minimum deposit of £5,100.

I'll just finish off by saying no matter which ISA you choose today, if it lags behind the competition further down the line don't put up with a poor return. Vote with your feet and transfer it to a better home.

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