Ditch old cash Isas as banks slash rates

Amidst the scramble among banks and building societies to offer the top rates, they are quietly slashing the returns paid on older, variable rate Isas meaning savers should wise up and ditch and switch where necessary (see Top Cash Isa Transfers guide).

A MoneySavingExpert.com investigation shows consumers could be over £100 a year worse off by sticking with an old account.

Now is the key time for anyone who opened a cash Isa – which is a standard savings account where the interest earned is tax-free – during last year's Isa season to act given most rates plummet after a year.

£100 down

Anyone who opened the best-buy Isa this time last year from Santander would earn £128 over the next 12 months on a £5,100 balance, which is £51 less than the previous year, once the bonus expires.

Those with older Isas are likely to have been earning lower returns for even longer.

A 3.5% deal from Abbey (now Santander) in March 2009 now pays 1.5%, slashing returns on a £5,100 balance by £102 to just £77.

Savers with even older cash Isas are likely to fare much worse.

While some new cash Isas pay over 3% interest, lobby group Consumer Focus says the average rate is just 0.43%, which will encompass many older accounts.

The top cash Isa rate that allows the transfer of old accounts is from Halifax which offers 3% on its Isa Direct Issue 4 deal (3.2% for some existing customers). This would generate a return of £153 (£163 for existing customers) on a £5,100 balance.

Savers can only open one new cash Isa per tax year and can pay a maximum of £5,100 into it during the current 2010/11 tax year which ends on 5 April.

As a result, there tends to be a rush in the weeks before the deadline approaches, which is called the Isa season. The allowance rises to £5,340 for the 2011/12 tax year which starts on 6 April.

Why do rates dive?

Returns fall largely due to the expiry of bonuses, which are a feature of most of the best buys. They tend to end after 12 months.

With base rate at a 0.5% historic low the only way for providers to support best buy rates of 3.35% – almost seven times the base rate – is to offer these temporary boosts.

It's not just the expiry of bonuses which is a problem for consumers. Banks and building societies tend to secretly reduce rates even when there is no drop in base rate.

MoneySavingExpert.com investigation

We looked into the top variable rate cash Isas in the 2009 and 2010 Isa seasons (in late March/early April) to demonstrate how the returns plummet once bonuses expire.

As the tables below shows, consumers tend to earn a lot less after 12 months, though this is not the case universally.

The Birmingham Midshires and Marks and Spencer Isas have bonuses that last over a year, though the return is still likely to drop once those bonuses end later this year.

If interest rates rise, it is likely providers will raise the rates on some accounts, but the differential between accounts with and without bonuses will still be apparent.

2010 top cash Isas

2009 top cash Isas

Research by Consumer Focus reveals almost a quarter of cash Isa savers do not know whether their account has a bonus, while a third with an introductory rate weren't sure if their rate had expired or not.

Meanwhile, more than a third of savers who hold a cash Isa have had it for more than five years, suggesting they are losing out on interest.

Martin Lewis, MoneySavingExpert.com creator, says: "The rule is pretty simple but the problem is many simply don't follow it.

"As most cash Isas include some form of bonus that lasts a year, put a note in your diary a year after you set your Isa up to check its rate. If it's pants, ditch and transfer to a new higher payer."

How to find your rate

One problem savers have is that providers make it incredibly difficult to find your rate as they are not published on most statements, though some banks are beginning to offer this service as they all must do by May 2012.

If the rate is not printed on your statement, you often have to search through tedious booklets and internet pages, and even then, many banks use similar names to label their accounts which makes locating the correct figure a challenge. If unsure, contact your provider.

When switching, always ask your new provider to transfer the cash and never close you existing Isa yourself, or you will lose the tax-free wrapper for that tax year.

And before you switch, watch out for any penalties that may apply if you move before the bonus expires.

Further reading/Key links

Best rates: Top Savings, Top Fixed Savings, Top Cash Isas, Top Cash Isa Transfers Stay safe: Safe Savings