Isa rates just got a bit nicer

Have you used your cash Isa allowance for this year? If you are one of the millions who hasn't, then the world of tax-free saving just got a lot more interesting. Santander (the new name for Abbey and Bradford & Bingley) and Alliance & Leicester this week launched a market-leading cash Isa account paying a guaranteed minimum of 3.5%, but for one year only. That's by far the best instant access Isa rate on offer, and it could prompt other big players to launch decent deals. Nationwide this week also unveiled a new range, at a lower rate than Santander but arguably better for longer-term savers. This month, research indicated almost four in 10 savers were set to turn their back on Isas this year. Many said they couldn't afford to save, though the lacklustre offerings from banks and building societies may have been a factor. But making sure your money is working hard for you is more important than ever when interest rates are low and rising inflation is eroding the real value of your cash. If you are a taxpayer and can afford to save, putting money into a cash Isa is a no-brainer. "If you're a higher-rate taxpayer, it is even more important," says Kevin Mountford at Moneysupermarket.com. But it may be worth holding fire, at least for a few days, to see if any other competitive deals are in the pipeline. • Isa factsheet • Compare cash Isas • End of tax year is a time to perk up Santander and its Alliance & Leicester arm have kick-started this year's Isa season with the launch of their Flexible Isa . This comes with a guarantee that the rate will not fall below the minimum rate of 3.5% during the first 12 months. It promises to pay at least 3% above the Bank of England base rate (currently 0.5%) during that period. So if interest rates rise in the next year, your returns will increase too. The account is available to new and existing customers, and has a minimum balance of just £1. The maximum you can pay in is your current annual cash Isa limit: £5,100 for the over 50s and £3,600 for under 50s: the latter allowance rises to £5,100 on 6 April. The account offers unlimited penalty-free instant access to your cash via ATMs, or over the counter, and can also be operated online or by phone. If you put in £5,100 now you would, after a year, have earned £178.50 interest. One disadvantage of the Flexible Isa is that it is for new money only. You cannot transfer Isa cash held with other providers. But the big drawback is that, after the year is up, you go on to the account's variable rate, which is currently 0.5%. That means you will probably be looking for a new home for your cash in 12 months. Make a note in your diary to review the situation then, otherwise you may end up losing out later. Cynics might say Santander is banking on a percentage of its account holders forgetting to transfer their funds, or not getting round to it. However, a spokeswoman says: "Customers are free to contact us and hopefully transfer to any other offerings we have at that time." Other decent rates on Isas include: • First Direct 's Cash e-Isa , paying 2.75% fixed until 31 August 2011 before reverting to a standard variable rate – at the moment, just 0.2%. You can start saving from £1, and it offers immediate access to your cash via internal transfer to another First Direct account. • If you like the look of Santander but want a deal that allows you to transfer Isa cash from another provider, the Spanish-owned bank's Direct Isa pays 2.75% for the first 12 months on balances of £9,000-plus (2% from £1), after which a variable tiered rate applies. • Nationwide's instant access online e-Isa , with a rate of 2.75%, which includes a fixed introductory bonus of 1% until 30 June 2011. To apply, you must already hold one of Nationwide's card-based accounts such as FlexAccount. • The one-year fixed-rate Isa from Aldermore , a new name in British banking but with the same £50,000 protection limit as other institutions. This pays 3.05% on a minimum £3,600 balance. Early withdrawals are allowed subject to a deduction of interest. • Newcastle building society 's Reward Isa , paying 3% on a minimum balance of £500, which includes a 1% bonus payable on the first anniversary. It can be operated by branch, post, online or phone. Withdrawals are subject to 120 days' notice or loss of interest. • Buckinghamshire building society 's 180-Day Notice Monthly Income Cash Isa , with a rate of 2.86%. The minimum balance is £100. There is, of course, always a risk that today's star-performing Isa will be tomorrow's dead loss. Some banks and building societies have been known to slash the rates they pay once they have pulled in lots of customers, so you need to keep a close eye on what you are getting and be prepared to move your Isa funds to another provider if yours is paying a poor rate . As financial data provider Moneyfacts points out, many savers don't have the time or inclination to trawl the market looking for the best account, and certainly don't wish to keep moving their money around to get a slightly better rate of interest. They would rather put their money in an account that pays a fairly competitive rate over the medium to long term than sign up for one where a top-of-the-table figure is paid one minute and gone the next. Research issued last month by Moneyfacts indicated building societies lead the way when it comes to playing fair on cash Isa interest rates. Its table of the accounts which have offered the most consistent returns over the past three years is topped by Earl Shilton building society 's 90-Days Notice Cash Isa , which pays 2.45%. Someone who had put £3,000 into this account on 1 January 2007 would, by 1 January this year, have earned £430 interest. Monmouthshire building society 's Cash Isa 2 , paying 2.5%, and Yorkshire building society 's e-Isa , paying between 1.9% and 2.25%, were in second and fourth place, with interest payouts of £424 and £417 respectively. Nationwide this week launched its Champion Isa , paying up to 2.5%. Its core rate is the average offered by the top five paying branch-based cash Isas from a group of "key competitors". Until 30 June 2011, it will include a fixed introductory bonus of 1.35% for balances of £1,000-plus. Moneyfacts says this account "could help savers make the most of their money, as it automatically tracks the interest rates from a basket of eight key competitors". The minimum opening balance is £1,000, and you get one penalty-free withdrawal each tax year without notice. Play by the rules More than four in 10 people are unaware of the new rules for Isas, according to research by Barclays. It was a similar message from National Savings & Investments, which said just 16% of the Brits it surveyed say they will definitely use their full Isa allowance and feel it is important to do so. So, what are the rules? On 6 October last year, the annual cash Isa allowance was increased from £3,600 to £5,100 – but only for those aged 50 and over. The new higher limits take effect for everyone else on 6 April. The new £5,100-a-year limit means people will be able to put up to £425 a month into a cash Isa, without paying tax on the interest they earn. But if you're under 50, the limit remains £3,600 for this tax year. Everybody is entitled to one Isa a year – so if you're married or civil partners you can both have one. If you take out a cash Isa, you can still put money into a tax-free investment Isa, which goes into stocks and shares. The limits on investment Isas are higher – £7,200 for the under 50s (until 6 April) and £10,200 for the over-50s. But whatever you put into your cash Isa will eat into your investment Isa allowance. So if you put the full £3,600 into a cash Isa, you can only put another £3,600 into an investment Isa. There is no requirement that you leave your Isa with the provider you first took it out with. Don't forget that all payments you make into your Isa count towards your Isa allowance. If you use up your allowance and then take money out of your Isa, you can't pay that money back in until the start of a new tax year. How low can they go? This year's top-paying cash Isas frequently turn into next year's laggards – so you need to keep a close eye on your interest rate to make sure you are not being left behind. So what happened to some of the hottest Isa rates of yesteryear? • In early 2000, internet bank Smile's cash Isa was paying 7.25%. Ten years on, the rate is 0.31% if you don't have a Smile current account, and 0.5% if you do. • If you think that's bad, spare a thought for those holding Alliance & Leicester's Premier Isa Issue 2. This was paying an impressive 8.3% in December 2008 – but by June 2009 that had plummeted to 0.1% (0.5% for those with more than £40,000 invested). • In early 2007 Barclays was swamped with applications for its table-topping Tax Beater cash Isa, which was paying 6.31%. It was withdrawn in May that year and now pays 0.56%. • The following year, Barclays launched its Tax Haven Isa, also paying 6.31%. This was pulled in March 2009 and now pays 0.83% (excluding introductory bonus). Meanwhile, you'll never get rich if you've got your life savings in Halifax's Variable Rate Isa Saver. This branch-based passbook account, offering instant access, pays 0.1% from £1 rising to 0.13% once you have £21,000 stashed away, and to 0.2% at £27,000. 'I invest in them each year' Maureen Flannery is a cash Isa fan and takes one out every year. "Ever since cash Isas came in, I've been buying them," she says. But the credit crisis has changed the way she chooses which account will get her money. In the past, it was "just about the rate", but now she is looking for more than just a decent return. Flannery, who lives in central London, says: "What I'm looking for now is not only a good rate but some financial security." This tax year, she decided to go for the Direct Isa offered by Santander, which pays up to 2.75%. "I've put my full amount in. They [Santander] have, I think, proved they are financially secure, and that, plus a reasonably competitive rate, is what I go for." She says part of the reason why this is important is that, for her, "this isn't something short term, it's long term". She regards these as investments she is making for when she is older. Flannery, a manager at a London local authority, has cash Isas with a number of providers, including the Post Office and Northern Rock. "What I probably need to do is change them over, but you have to have the time, and look for the right products."