Beware, not all table-topping Cash ISA rates are as straightforward as they appear. Here are some of the most common catches to be aware of - and the solutions that help us stay on top.
Cash ISAs can be a great way to save. But time is running out – we only have until 5th April to use this year’s Cash ISA allowance or lose it forever. As a result, providers are busy advertising their Cash ISA rates in an effort to persuade us to part with our cash.
But ‘all that glisters is not gold’ – read the small print and you could find there a few hoops to jump through before you’ll see that interest in your account.
Nevertheless don’t let that put you off – forewarned is forearmed.
Here are some common Cash ISA catches to be aware of – and the solutions that help us stay on top.
1. Bonus Rates
Top of the list are ‘bonus rates’.
Providers tack a short-lived but healthy bonus onto a stingy interest rate, thus artificially boosting it to earn a place on the Best Buy tables. We sign up, forget the bonus disappears after just 12 months – and leave our money languishing in a dismal account.
Santander, for example, is currently advertising its Direct ISA Saver with a table topping interest rate of 2.5% AER.
However, that includes a 12-month 2% bonus – after which the rate plummets to a measly 0.5% AER. Ouch.
Solution?
Fight the inertia – put the date the bonus ends in your diary and be prepared to transfer your cash to another best buy ISA when that time comes.
Or look for accounts offering a straightforward rate. The NS&I Direct ISA, for example, simply pays 2.25% AER (with no bonus) on sums of £100+.
2. "We only want new money"
Coventry Building Society is currently offering a rather appealing 2.8% AER on its 60-day ISA (including a 12-month 0.6% AER bonus).
But beware: if you already have a Cash ISA from a previous year and would like to transfer it to this product, you’re out of luck – like many Cash ISAs the Coventry has annoyingly restricted it to "new money only”.
Solution?
[SPOTLIGHT]Look for alternative products that specifically allow 'transfers in'.
Cheshire Building Society's ISA Saver currently pays 2.5% AER (including a 2% bonus until July 2014) and will let you transfer in existing ISAs.
But if the rate on the “new money only” account really is far better than the rest, why not stash this year’s allowance in it and transfer your existing ISA to an alternative best buy account that does allow transfers in?
3. Penalty fees for withdrawing your cash
Halifax is currently offering a good (in the current market) rate of 3% AER. You need £500 to open an account and it does allow transfers in.
The catch? To earn this rate you must be prepared to lock your money away for three years. Withdraw your cash early and you’ll forfeit 270 days interest. Eek!
Solution?
Check for penalties and ensure you are happy with the terms before signing up.
Fixed term accounts are best suited to those who are looking to save long term. If there’s a possibility you will need to withdraw your cash within a year, restrict yourself to instant access accounts.
4. Slow transfers
When a market-beating Cash ISA comes along, it tends to be swamped with applications.
Unfortunately, dealing with a backlog of applications can leave applicants’ money floundering in a financial “no man’s land', having left our bank accounts but not having re-appeared in our new account. In the worst cases, money can be floating around for months – aggravating when you realise we’re losing interest every day.
Solution?
Fortunately, the Office of Fair Trading (OFT) has ruled that ISA transfers must take place within 15 days.
If your transfer takes longer than this, your new provider must backdate your interest to day 16 of the transfer process, or to the date on the cheque – whichever is earlier. So contact your new ISA provider without delay – and contact the OFT if your transfer does not adhere to these rules.
5. Linked Cash ISAs
Finally, Santander’s been advertising its 123 Major ISA, which pays a healthy 3% AER fixed for two years. Account holders will even gain an extra 0.1% bonus if Rory McIlroy wins an eligible golf ‘Major’!
Reading a little more closely however, you realise that applicants must be a Santander 123 Current Account or 123 credit card customer to qualify.
Solution?
Even the biggest golf fan might balk at the idea of moving bank account simply to gain a little more interest – although if your current account is less than satisfactory it may be worth investigating.
Finally, remember when opening or transferring Cash ISAs make sure you're putting your money in an account protected by the Financial Services Compensation Scheme – and never save more than £85,000 with the same provider, as any amount over that limit won't be protected.
Happy saving!