By the end of June, over 5 million people will have opened a cash ISA for this year. Don't get left behind!
The new tax year is already six weeks old. Have you opened your cash ISA yet?
You may think it's a bit early to be thinking about such things but the three months from April to June is peak season for cash ISAs. In recent years, around 55% of cash ISAs have been opened in this quarter. People aren't just opening accounts and not putting anything in them either - 45% of the money saved throughout the year is saved in these months. With around 11m cash ISAs expected to be opened this year, this means over 5 million people will have opened a 2007/08 cash ISA by the end of June.
In total, we have savings of £140b in cash ISAs. Those who have invested the full amount at the start of each tax year since cash ISAs were introduced in 1999 could now have around £40,000 saved up, £10,000 of which would be interest. No doubt there are a few Fools in this position.
Actually, strictly speaking, some people who had TESSA-Only ISAs could have even more than this, as from 6 April 2008 these accounts are now classified as cash ISAs. TESSAs were the predecessors of cash ISAs and any amounts left in these accounts post 1999 could be rolled into a TESSA-Only ISA to preserve its tax free status.
With such large sums at stake, it's important to make sure you're getting the best rate you can. ISA accounts suffer from the same malaise as ordinary savings accounts in that accounts that were competitive a year or two ago tend to drift slowly southwards. The Direct ISA account from National Savings & Investments is a good example. Once it led the pack and had a decent interest rate guarantee as well. Nowadays its rate of 5.3% is around one percentage point off the pace.
What rates are on offer?
If you're looking to put new money into a cash ISA then you have over 200 accounts to choose from. The rates on offer are pretty competitive at the moment. Around a fifth of them offer a rate of 6% or above. Not bad when you consider the base rate is currently 5%.
Indeed two thirds of all cash ISAs currently offer a rate equal to or greater than the base rate. Less than ten offer a rate of less than 4%. Compared with ordinary savings accounts, this is impressive stuff. Only a quarter of easy access accounts offer a rate of 5% or above.
Small is beautiful
The top of the cash tables tend to be dominated by small building societies. Currently, we have National Counties Building Society offering the best `clean' rate of 6.26% (i.e. no bonus strings attached). Then there are raft of fixed-rates for one or two years around 6.15%. These fixed rates aren't as high as those you can currently get outside of an ISA unfortunately but they still look like pretty reasonable deals.
The big banks do offer some good accounts. Barclays' exotic sounding Tax Haven ISA offers 6.25%, albeit with a 1% bonus rate for the first 12 months. HBOS, via its Birmingham Midshires subsidiary also offers some of the highest fixed rates.
Beware of tied ISAs
There are some unusual ISA deals around which can offer very high rates of interest. Abbey's Super ISA is one such deal. It pays 9.75% for 13 months before it reverts to Abbey's standard ISA rate. Such deals sound too good to be true, you may think and you'd be right. In this case, you need to invest at least the same amount into Abbey's Guaranteed Growth Plan, which is a guaranteed equity bond. Alliance & Leicester was offering a similar product offering 10% interest but this has now been withdrawn.
As a general rule, it's worth steering clear of tied products like this. Just like payment protection insurance sold with loans and mortgages, one of the products tends to be a pup.
Picking a new cash ISA
Unlike many financial products, picking a cash ISA is relatively simple. Indeed you could say there are just five things to worry about.
The rate - Let's start with the obvious one. Most deals are variable but watch out for any bonus rates that may only last for six months or a year. Interest rate guarantees are worth seeking out although the best deals usually pay more than the guarantee to start with and then drift back over the following year or so.
Notice period and penalties - Most cash ISAs are easy access but some have notice periods. Watch out for interest rate penalties on fixed rate accounts which can be up to half a year's interest on top-rate deals.
Transferring in other cash ISAs - Not all accounts will let you transfer in money from other cash ISAs you already have. If you've built up a significant savings pot this can be a key consideration. Again it's often the top-rate deals that are affected by this.
Minimum amounts - Almost half the cash ISAs on offer will let you open an account with as little as £1. But some of the top-rate deals require a minimum of £1,000 or even the new full annual subscription limit of £3,600.
Branch, post, phone or internet - How you want to operate the account is the last thing to consider. Many of the top-rate deals can only be accessed by one or two of these four methods.
Now you're ready to go and choose your new cash ISA. Make sure you visit our ISA centre on the way out. Here's to many years of tax-free interest!