Savers have poured £70 billion into cash Isas, compared with £35 billion in equity schemes. If you do not pick a good deal, you can miss out on £277 a year in interest.
Following this month’s rise in the base rate, Abbey has the best easy-access Isa at 5.35%. If you had £15,000 in the postal scheme, you would earn £803 a year. If your money was with Northern Rock, which pays only 3.75%, you would get £526.
Sue Hannums at Chase de Vere, an adviser, said: “A lot of people stick with their original Isa company because they don’t realise they can transfer the money without losing the tax break. It’s as simple as changing any other account — all you need to do is fill in a form.”
Banks and building societies often launch top deals to draw in customers but then cut the rate. For example, thousands of people opened a Smile cash Isa. After it was launched in October 1999, it topped the best-buy tables with a rate of 6.5%, when the base rate was 5%. But Smile has not put up its rate following this month’s base-rate rise, and savers now earn just 4% — 0.75 points below the base rate. If they also have a Smile current account, the rate is 4.75%.
First Direct’s Isa has also disappointed. In March 2000, it was one of the top accounts with a rate of 6.85%. From Wednesday, customers will get 4.35%.
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Most cash Isas have moved in line with the recent rises in the base rate. Savers should feel the effect of this month’s rate increase from September 1.
The best accounts will be Abbey’s postal Isa, which will pay 5.35%, Yorkshire building society’s internet-only Isa at 5.2%, and the scheme from Kent Reliance that will go up from 4.86% to 5.11%.
If you are worried that your Isa rate will not remain high, there are a number of accounts that carry guarantees. They do not always pay the top rate, but at least you know that you are getting a decent deal.
For example, Abbey’s postal Isa guarantees to pay at least 0.5 points above the base rate until April. Intelligent Finance’s account guarantees it will be at least 0.3 points above the base rate until January 31. It currently pays 5.1%. Marks & Spencer’s cash Isa promises to be at least 0.5 points higher than base until April. It pays 5.25%, but is now closed to new business.
You will, of course, need to check the rate when the guarantee expires. You may therefore prefer an account that has consistently paid a good rate.
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Paul Ilott at Bates Investment Services, another adviser, said: “Some people don’t want the hassle of chasing the best rates and instead feel more comfortable with an account that has paid a consistently good rate, rather than the very best.
“The highest rates often include bonuses that only boost short-term returns, leaving loyal savers worse off in the longer term once the bonus period ends.”
For example, Portman building society’s 45-day notice Isa will pay 5.5% from September 1, but this includes a six-month bonus of 0.65 percentage points. Over a year you would earn £776 interest if you transferred £15,000 to this account. If you opted for Abbey’s postal Isa instead, paying 5.35%, you would get £803.
You can often earn more interest if you opt for a fixed rate. However, you will not normally be able to make any withdrawals during the fixed period. Some deals allow you to take money out, but you will have to pay a penalty.
Advisers recommend you fix only for one or two years. The danger of locking in for longer is that you will be stuck with a poor rate if interest rates rise. However, now may not be the best time to opt for a fix.
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The current crop of fixed-rate deals are not much better than the variable rates. Northern Rock has a good one-year deal that pays 5.5%, but the best two-year rate is 5.35%, from Halifax and Portman. Abbey’s postal Isa is therefore probably a better option.