Make much more of your tax-free ISA allowance

Banks are under the spotlight again after it was revealed that the majority of cash ISAs offer shambolic rates of interest.

Research has shown that tax-free savings have only benefitted savers to the tune of 0.53% on average - just £5.30 per year for every £1,000 invested.

But many offer well below this average. The worst offering during 2011 was Cheltenham & Gloucester’s cash ISA, which offered 0.05% on a £1,000 sum. A host of high street banks, including Barclays, Halifax, RBS, and Santander, offered 0.1%.

More confusing yet is the disparity between rates offered by the same institution. Santander’s Flexible ISA 3 topped the market at 3.3%, followed by Nationwide’s e-ISA, which ranked joint-second, at 2.8%. However, both of these providers offered alternative products which ranked amongst the most miserly for their returns.

C&G reissued its cash ISA to offer up to 2.7% with a strong 1.7% bonus in the first 12 months, but this left old customers stranded with meagre returns on the old account.

David Black, of data analysts Defaqto, notes that banks strategize carefully with regards to ISA provisions: "From the provider’s point of view, it is much cheaper to launch an account with an attractive headline rate than to pay that rate on all its existing accounts as well."

While many consumers recently reported regrets at not exploiting their tax-free allowance in 2011, in many cases, tax-payable savings products, such as fixed-rate bonds, have offered considerably better rates of return.

Furthermore, cash ISA savers are often penalised rather than rewarded for their loyalty. Many ISA accounts are offered with initial bonus periods, typically for 12 months, after which rates suffer a dramatic fall. Halifax’s ISA saver, for example, offers 2.4%, of which 1.9% is a first year bonus. After 12 months, savers could see their rate plummet to 0.5%, below the average rate of return.

The good news is that you are able to switch to a better ISA, and banks have to comply within three working weeks.

If you are looking for an instant access cash ISA, Which4U lists Nationwide’s e-ISA, which offers 3.1% on deposits over £1,000 until August 2012 (1.75% thereafter), and ING Direct’s Cash ISA, which offers 3% for the first year on deposits from only £1 (though existing balances cannot be transferred to this account).

Shorter-term fixed-rate ISAs include Hinckley and Rugby’s 1-year fixed ISA at 3.1% and the Bank of Ireland’s 18-month fixed-rate ISA at 3.5% (both operated by Governor for deposits over £100).

Considering how much higher these rates are than the average ISA return, why not make your move today, and make much more of your tax-free ISA allowance?

Keith McDonald
Which4U Editor

For more on savings accounts and compensation, particularly where overseas banks like ING Direct are concerned, see our savings regulations information.