Golden window before the savings tax trap strikes: Make an extra £5,000 by locking in a top new deal...
As the Isa deadline approaches, savers are scrambling to make the most of their £20,000 annual allowance by seeking out the best deals and opening new accounts.
You have until the end of the tax year – April 5 – to use your allowance, or else you'll lose it.
But if you fall into the trap of simply focusing on using this year's allowance, you risk losing out on the bulk of returns available to you.
That's because savers frequently overlook the Isa money they have tucked away in previous years, which tends to be far more substantial than the new money they are adding to it.
This week is the golden window for Isas, when banks compete for your new and old Isa money by offering the best rates.
So it's the perfect time to transfer old Isa pots and put yourself on track to make hundreds of pounds in extra interest before the best rates are withdrawn.
Time to switch: Even if you picked a top rate when you opened an Isa, if you did it more than a year or two ago your rate is likely to be languishing now
Why your money is losing value
Even if you picked a top rate when you opened an Isa, if you did it more than a year or two ago your rate is likely to be languishing now.
That's because most 'best-buy' Isas from previous tax years see their rates fall dramatically as soon as their short, fixed-term ends.
Antonia Medlicott, founder of personal finance website Investing Insiders, says that the cost of leaving your old Isas where they are is as much as £14,000 over a decade on an average Isa balance.
'The gap between the best and worst rates currently available in the cash Isa market is striking,' she says. 'By staying loyal, many savers are unknowingly costing themselves a lot of money.'
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The golden switch
Take advantage of the current golden window – the four weeks either side of the new tax year – when the best Isa deals are available and transfer now.
'We're seeing fresh best buys come on to the market almost daily,' says James McCaffrey, from comparison website TotallyMoney.
'If you're sitting on savings, check the rate your provider is paying and, if it's below 4 per cent, consider moving your money.'
Medlicott says that this is one of the most competitive years she can remember for Isa deals, describing the situation as 'an Isa rate war'.
Savvy savers who open new Isas are the winners in this battle, gaining returns far above inflation, while loyal customers who don't switch their products lose out.
Accounts to ditch
Some old Isas are paying as little as 0.75 per cent, far below the inflation rate of 3 per cent.
High street banks are typically the worst offenders – luring people in with great rates then keeping their money earning far less for longer.
'Savers assume their bank will automatically move them to competitive rates or stick with the big traditional brands out of habit or convenience,' says Medlicott.
'Unfortunately, those same legacy providers are often the ones paying the least competitive rates.'
Legacy rates
If you've got an old Isa with a high street bank, you might be surprised how little it is paying you.
Once the initial term of your Isa ends, you'll find you are receiving interest as follows:
- Lloyds Bank, 0.75 per cent on balances under £25,000, rising to 0.9 per cent above this on an Instant Cash Isa
- Santander, 1 per cent on an Isa Saver
- Barclays, 1 per cent
- Nationwide, 1.1 per cent on the first £10,000 rising to 1.15 per cent after that on a Fixed-Rate Cash Isa Maturity account
- NatWest, 1.15 per cent on an Instant Access Cash Isa
- HSBC, 2 per cent on a Loyalty Cash Isa
- The Post Office, 0.9 per cent
If you stick with these rates, your Isa is losing value in real terms. Inflation is running at 3 per cent, so an Isa with an average balance of £26,900 may gain £201 in interest over a year, but this will be worth just £26,312 in today's money when inflation is considered. That's less than when you put the money in.
Moving the average Isa balance of £26,900 from the Lloyds Isa to a top-paying new account would earn you £1,223.95 in interest on the same balance and could leave you more than £1,000 better off in just one year.
Smart move: Savvy savers who open new Isas each year gain returns far above inflation , while loyal customers who don't switch their products lose out
Best new offerings
Some of the highest-paying Isa products available at present allow you to transfer in existing Isas to benefit from new high rates.
Some of the best deals on the market include:
- 4.55 per cent Easy Access Isa from Tembo Money, including a 1.15 pc bonus for 12 months;
- 4.26 per cent Isa with Moneybox, which allows you to withdraw three times in a year without losing your rate;
- 4.35 per cent one-year fixed-rate Isa with Close Brothers;
- 4.35 per cent one-year fixed-rate Isa with Castle Trust;
- 4.35 per cent two-year fixed-rate Isa with Furness Building Society.
Making the transfer
If you take money out of your Isa and then try to put it into a new one, it immediately loses the tax-free status that it acquired in earlier years.
Instead, follow the proper Isa transfer process to ensure your money remains safe in its tax-free wrapper, earning money for you, not the taxman.
Isa transfers are initiated with a new provider, so open a new Isa account first – checking that the new Isa allows transfers in – and then follow the process on their website to enable the switch.
This involves giving your old Isa details to your new provider, including your account number and sort code, and giving consent for the transfer.
You'll also need your National Insurance number.
A cash Isa transfer usually takes 15 working days. If your old, fixed-rate cash Isa is about to mature, you can usually request a transfer a couple of weeks in advance to lock in high rates.
If your cash Isa transfer takes longer than it should, complain to your provider in the first instance and then, if you're unhappy with the response, contact the Financial Ombudsman Service (financial-ombudsman.org.uk/).
Move stocks and shares too
You can also transfer stocks and shares Isas to a new provider.
At the moment, you are free to move any old Isas between cash and stocks and shares products, as long as you follow the transfer processes outlined above.
It's not always easy to compare the cost of stocks and shares Isas, as they often include extra fees.
The Association of Investment Companies (AIC) has tables that can help you work out the cost of your own portfolio on different platforms. Go to: theaic.co.uk/invest-engage/costs-at-a-glance.
Switching an investment Isa is a bit more complicated than doing the same with a cash Isa. These transfers can take a lot longer – up to 12 weeks in some cases if there are international shares involved.
Types of transfer
1. In specie: Your old and new provider have the same funds and shares so your investment portfolio just moves over without being sold and bought again.
With an in-specie transfer your investments are not sold and bought, so there is no risk that you miss out on market returns while you are uninvested.
2. A cash transfer: Your new provider and your old one do not have the same types of fund or share, so your portfolio is sold and then bought again in your new Isa.
3. A hybrid transfer: Some investments can be transferred, and others cannot, so your new provider uses a mix of the two strategies above.
Don't be blinded by 'bling' offers
For this year's golden window there is an abundance of cashback offers where you're offered a cash bonus for transferring your Isa.
A significant number of banks and investment groups are offering incentives aimed at encouraging you to switch your Isa to them.
These include 3 per cent cashback on stocks and shares balances transferring to an eToro Isa, £150 per £10,000 for transferring a cash Isa to Lloyds and up to £500 for transferring to HSBC.
While some of these can be lucrative, others aren't as good as they seem, says Andrew Hagger, personal finance expert at Moneycomms, who says you should always consider the cash incentive and the interest rate you're being offered together. You should also check how long you need to hold the money to get the bonus.
Hagger points out that cashback offers such as that offered by Lloyds, where you get £150 cashback for every £25,000 of Isa balances you transfer 'sound good on the face of it'.
However, £25,000 in a one-year fixed-rate Isa with Lloyds is paying 3.70 per cent – whereas the best buy from Castle Trust Bank pays 4.35 per cent.
'That's an extra £162.50 in interest over the year on £25,000 – more than wiping out the £150 bonus,' he points out.
