When you're looking for the best cash ISA, how can you separate the wheat from the chaff? Serena Cowdy finds out.
In simple terms, a cash ISA is a good safe place to stash your savings away, tax-free. But which one is leading the market at the moment? And what does `market leading' actually mean?
Here, I'm going to highlight what you should look out for when you're choosing your next cash ISA. I'm also going to point out a couple of my top picks, in case you're looking for one right now.
A safe savings pot
Stock markets all over the world are looking shaky. Ok, that's an understatement. Many UK stocks are on a rollercoaster ride, and with the economic uncertainty set to continue, many people don't feel confident investing in shares at the moment.
If you're looking for a more predictable place to invest your savings, a variable rate cash ISA could be just the thing.
Variable rate ISAs are more flexible than their fixed-rate counterparts (meaning you can access your money more easily). The best ones make sure your savings grow a bit faster than the rate of inflation (currently at 5%). And best of all of course, they're tax-free.
Cash ISAs - need-to-know
Choosing the best variable rate cash ISA on the market can get a bit confusing. Almost every time a new one is launched, it's dubbed `market leading' by its provider.
So - which one should you really go for? When making up your mind, here are the key factors to take into account:
The headline rate: This is the AER (Annual Equivalent Rate) the ISA will start at, and is the one the provider will really highlight, to try and sell the product. The AER tells you how much interest you're actually earning over the entire year.
Introductory bonus? The word `bonus' sounds nice, but when it comes to savings accounts, a high introductory bonus rate is not a good thing.
If a large proportion of a juicy headline rate is actually a temporary bonus - which is only in place for, say, six months - you could end up being paid a measly rate of interest once this six-month period comes to an end.
So you should always take temporary bonuses into account when being seduced by hefty headline rates.
Transfer in? Some cash ISAs don't allow you to transfer cash in from others that are no longer competitive.
So if moving money from one ISA to another is important to you, make sure your new one allows it before you commit yourself.
Withdrawal charges: Some cash ISAs penalise you for withdrawing cash.
As I've just mentioned, you may want to pull all of your money out of the ISA when the deal becomes uncompetitive - so watch out for any withdrawal charges.
So which is the best?
Here's a table to show you how three `market leading' ISAs differ from one another:
Cash ISA | Headline rate (% AER) | Bonus rate | Transfer money | Minimum | Minimum | Withdrawal |
|---|---|---|---|---|---|---|
6.25% | No | No | £1 | £1 | None | |
Barclays Tax | 6.25% | A 12 month | No | £1 | £10 | None |
The Post Office | 6.25% | A 12 month | Yes | £1 | £10 | None |
The HSBC E-ISA is my top pick because it does exactly what it says on the tin. It offers a high, 6.25% headline rate, there's no introductory bonus rate attached, and there's no charge for withdrawing your money.
On the downside, you can't transfer money into it from another ISA.
In second place I'd put the Barclays Tax Haven ISA. It offers the same attractive headline rate of 6.25%, with no withdrawal charges.
However, that 6.25% does include a 1% bonus rate which disappears after 12 months, making it a slightly less attractive option. And again, you can't transfer money from other another ISA.
Bringing up the rear in the 6.25% category is, for me, The Post Office Cash ISA.
It includes a hefty 1.5%, 12 month introductory bonus rate, which when removed leaves you with a rather measly rate of 4.75% (lower than the current base rate).
On the plus side, however, unlike the others it does allow you to transfer money in from another ISA. And it also includes a rate guarantee, albeit not a great one: It guarantees its rate will never be more than 1% below base rate.
Keep your eyes open!
A variable rate cash ISA is just that - its rates can change at any time. So with this sort of savings account, you need to keep your eyes open, and be ready to jump ship if a more competitive deal comes along.
If you're looking for a slightly higher, secure interest rate - you might want to consider a fixed-rate cash ISA instead.
Just remember fixed-rate ISAs aren't as flexible. Read my Foolish colleague Martin Morris' article - Fix Your Cash ISA And Beat Inflation - to find out more.
Happy saving!
More: ISAs Beat The Credit Crunch
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