ISA savers may need to shop around
ISA savers could be missing out because they keep their money in accounts with poor returns.
Some savers could be sacrificing as much as £1,300 a year by not switching their savings to accounts with higher interest rates.
Michelle Slade of the financial website Moneyfacts said: “Many people are sitting on sizeable savings of they have taken out ISAs over the past decade. So while it makes sense to check you’re getting the best rate you can on any new ISA, the priority should be to make sure your existing ISA savings are still earning a fair rate.”
Some banks and building societies lower the rates on older ISA accounts.
The figures from Moneyfacts suggest that anyone who has invested the maximum amount allowed in an ISA account each year could have a savings pot of almost £50,000 before any interest payments.
However, if such savers had moved their money to the highest yield one-year fixed-rate accounts for each of those years, then their savings could now total £70,000.
In truth, most ISA savers will have enjoyed much lower returns. The average return delivered by a cash ISA is just 1.71 per cent. Some offer as little as 0.1 per cent.
Yet some deals provide interest rates as high as 4.3 per cent.
Ms Slade continued: “This difference in interest rates can add up to a significant sum if you are sitting on ISAs worth £50,000.”
Kevin Mountford of Moneysupermarket.com pointed out that the banks and building societies, hungry for cash, have been promoting several new ISA offers: “The traditional ISA season appears to have started early, and, in general, savings providers are being more aggressive than normal.
“If you have had an ISA for more than 12 months, the chances are you will be on a much lower rate, and it will be beneficial to switch.”
The vexed issue for many ISA savers is that the majority of new offers revolve around a short-term bonus rate. The rates, which can be attractive, usually have a built-in obsolescence: they only last for a year and represent somewhere in the region of half the interest to be paid.
When the bonus is withdrawn, the interest rate slips to a below-average rate even though the money generated is still protected as tax-free.
Matters are compounded by the fact that most providers introduce a new ISA each tax year.
Michelle Slade continued: “This can lull savers into a false sense of security. If a bank offers one of the best-paying ISAs year in, year out, customers could be forgiven for thinking they are getting a good long-term deal on their money. In reality, they are probably getting a good deal for 12 months on a relatively small sum of money, while the bulk of their savings is earning next to no interest.”
To make sure their money is working harder, savers who invest in fixed-rate ISAs should seriously consider swapping accounts once the set period has elapsed.
Andrew Hagger of Moneynet.co.uk highlighted a further reason for good planning of ISA savings and for moving accounts ahead of investing in new deals.
He said: “Although transfer times have reduced, it is still likely to take 15 working days to switch ISAs from one provider to another – and this is if nothing goes wrong. It doesn’t make sense to leave it until the end of the tax year to start transferring these accounts as ISA providers are likely to be concentrating on new business, and it could take even longer.”