The ISA (Individual Savings Account) offers a convenient, tax-free way for people in the UK to save money. Currently capped at £5,340 per year (a limit fixed by inflation), investing in an ISA is arguably one of the most lucrative methods of saving offered by British lenders.
Although the process of opening an ISA is relatively straightforward, many savers fail to realise that leaving an account untouched for several years is not necessarily the best way to manage their money.
Set by the Bank of England’s Monetary Policy Committee (MPC) and otherwise known as the base rate, the Bank Rate is a level of interest applied to loans and reserves supplied to banks. In the UK, the Bank Rate has not budged from 0.5 per cent since it was lowered in March 2009 to steady the turbulent economy. One year earlier, in February 2008, the Bank Rate was set at 5.25 per cent.
The low Bank Rate has provided help to people on variable-rate mortgages, but savers have been hit hard in consequence. In early 2012, there was hope that the base rate would be increased to control inflation, but the MPC remains committed to a low Bank Rate until the British economy shows signs of recovery. Unfortunately, it would seem that the 0.5-per-cent rate is a semi-permanent fixture.
Individual Savings Accounts attract various levels of interest, but all remain subject to the base rate. Most banks offer introductory rates for new customers, so it is not unusual to see ISAs with 3 or 4-per-cent rates for the first year.
In March 2011, the Loyalty Flexible ISA, provided by Santander, offered a rate of 3.5 per cent – 3 per cent higher than the Bank Rate. The company’s Flexible ISA Issue 3 had a rate of 3.3 per cent last year.
If savers were expecting the base rate to increase this year, many will be disappointed in 2012. Santander’s top two products will drop to a rate of 0.5 per cent in line with the Bank Rate as of March.
The difference is better experienced in real-money terms. A balance of £5,100 would accrue interest of £178.50 at a rate of 3.5 per cent, whereas the same figure would earn just £25.50 at the 0.5-per-cent rate. Clearly, savers are continuing to suffer while the MPC holds out for a stronger economy.
Most other lenders are expected to drop interest rates for savings accounts this year, but savers need not sit back and watch as their accounts gather dust.
Because most lenders offer introductory bonuses, it often makes sense to switch providers at the end of the current year. The process of transferring an ISA is not always straightforward, but the effects of a low base rate can be staved off to an extent by regularly reviewing options with the aim of making the switch if necessary.
One of the most generous products available at the moment is the cash ISA provided by Cheshire Building Society. Set at a rate of 3.06 per cent for balances of £1,000 or more (if less, the rate plummets to 0.25 per cent), the Cheshire Building Society ISA is only available to new customers.
Savers who wish to transfer existing savings can take advantage of Newcastle Building Society’s 3.05-per-cent rate. Unfortunately, only half of the top six providers permit the transfer of existing ISAs.
Moving money is not always easy, but shopping around for the best deals can give rise to substantial savings.