A watchdog has requested an Office of Fair Trading investigation into savings account providers offering temporarily high headline interest rates as a method of attracting savers to cash Isas.
The best Isa rates
are traditionally offered close to the so-called 'Isa season' which falls around the end of the current tax year and the beginning of the new (5 – 6 April).
Individual Savings Accounts (Isas) were introduced in the UK 11 years ago, offering people a tax-free incentive to encourage them to save.
The average interest rate on a cash Isa stands at just 0.41%, according to Consumer Focus, with several banks and building societies "baiting" new customers through short-term higher rates.
The watchdog's approach was criticised by the British Bankers' Association (BBA)
Consumer Focus made a super-complaint to the trading regulator regarding the £158bn cash Isa market.
The statutory consumer organisation believes that people are missing out on interest returns of up to £3bn every year, partly due to the difficulty of switching Isa providers.
The Office of Fair Trading (OFT) is now required to consider the complaint then provide a response within 90 days.
A BBA spokesman said Consumer Focus chose to launch its complaint "without any discussions with the banking sector".
"If we had been given the chance, we could have explained the work we are already doing with the regulator to help Isa customers," he added.
Around 37% of households in the UK currently have money deposited in a cash Isa. A significant proportion of those use up their full annual Isa allowance.
In the new tax year beginning 6 April, the limit people can save in Isas each year will increase from £7,200 to £10,200, half of which can be put into a cash Isa,. plus half, or the full allowance, into stocks and shares Isas.
As one might expect at this time of year, there are several high paying cash Isas, with even more attractive returns for those that are willing to lock their cash away into a fixed rate Isa. For example, the RBS Isa
pays 4% on its 3-year plan, with the option to transfer cash from previous years' Isas.
If you would prefer to earn tax-free interest on an instant access Isa, consider either the Alliance & Leicester Isa
or Santander Isa
both offering 2% on balances of £1-£9K and 2.75% on anything above. Alternatively the Lloyds Isa
pays 2.50% with instant access.
Written by Sam Gooch