Best Cash ISA Savings Account as April 5th 2010 Tax Year Deadline Looms
Personal_Finance / ISA's Mar 27, 2010 - 12:01 AM GMTBy: Nadeem_Walayat
Firstly, some great news in Labour's last Budget for ISA savers and investors, in that the ISA allowances will now rise in line with inflation which starts with the new total allowance of £10,200 from 6th of April 2010 for all ISA savers that basically makes up for not having indexed the original allowance of £7,200 for the past 10 years. For cash ISA savers this means £5,100 will rise annually inline with the RPI inflation index from April 2011 which will make significant difference over the long run i.e. at an average inflation rate of 3% the total annual ISA of £10,200 in 10 years time will stand at £13,708, with a total additional allowance of £18,440 (£9,220 cash) so a significant difference and an even greater potential for cash ISA's to be used as a relatively risk free pensions savings vehicle without all of the tricks, fees, charges and risks built into the existing stake-holder and personal pension plans that ensure pension investors don't get anything like the returns they are promised.
An even better Budget change would have been if savers were allowed the option to utilise the whole ISA allowance for Cash ISA's instead the current rule continues to exist where all of the allowance can only be utilised for shares and the option to convert from Cash ISA's to share ISA's but not from shares to cash.
Only 1 week remains for savers to utilise at least their £3,600 cash element of their current tax years £7,200 ISA allowance. Even if you have already utilised this years allowance, savers need to ensure that they check the interest rates being paid on ALL of their cash ISA accounts on a regular basis, especially for those accounts that have matured as the banks and building societies are notorious for including 1 year bonuses that disappear on anniversary or dumping matured fixed rate accounts into pittance paying cash ISA accounts paying as little as 0.1%. i.e. 1/30th the rate of a top current instant access accounts which on an ISA account balance of £3,600 means the difference between receiving £3.60 or £108 in interest per annum.
Whilst savers are counting down the remaining 4 working days left, utilising your ISA allowance as soon as the new tax year starts on 6th April 2010 should also not be ignored so as to maximise tax free interest earning potential, especially as mentioned earlier the new tax year allowance rises to £5,100 for Cash ISA's.
Current Interest Rate Market
Current savings interest rates remain depressed in the region of between 2% and 3.5% upto 1 year fixed rate accounts. Longer range fixes are available of as much as 4% if savers lock in rates for at least 3 years. However with RPI inflation at 3.7% virtually all savers are fighting a losing battle against high inflation with savings rates consistently below the inflation rate as a symptom of a heavily supported bailed out banking system that solely functions with a view to the transfer of cash onto the bank balance sheets, be that tax payer funds or savers subsidising the banks by means of interest rates well below that of the rate of inflation. Unfortunately at this point in time there is little that savers can do but to bare through the next 6 months or so in advance of a return to a more normal interest rate market as basically the financial markets via the government and corporate bond markets will force the Bank of England to raise UK interest rates. Therefore taking account of future higher interest rate expectations, I would be reluctant to fix rates for more than 1 year.
Best Current Variable Rate ISA's
| Financial Institution | Interest Rate | Minimum £ | Comments |
| A&L / Santandar Flexible ISA | 3.5% | £1 | This account offers a guaranteed rate of 3% above the base rate for 1 year. So the account tracks the UK base rate with a 3% bonus for the first year only. An excellent 1 year hedge against future interest rate hikes. No Transfers in. |
| Barclays Golden ISA 2 | 3.1% | £1 | Includes a 1% bonus. Barclays mortgage holders can offset their mortgage balance against their ISA balance and hence boost their effective return on ISA savings. |
| First Direct | 2.75% | £1 | Offers a fixed rate of 2.75% until August 2011. Allows transfers in. |
| Newcastle BS | 2%-3% | £500 | 120 day notice - Pays 2%, or 3% on whether funds are held until anniversary |
| Standard life | 2.65% | £1 | Taken over by Barclays. Postal / Online, allows transfers in. |
Best Current Fixed Rate ISA's (1 Year Max)
| Financial Institution | Interest Rate | Fixed Period | Minimum £ | Comments |
| Aldermore | 2.9% | 1 Year | £3,600 | Previously Ruffler Bank, accepts transfers in. |
| Northern Rock | 2.75% | 15/11/11 | £500 | Fixed until March 2011. Tax Payer owned Bank - On maturity converted to a 30 day notice ISA paying a pittance. |
The clear winner remains is the A&L / Santandar 3.5% Tracker Cash ISA that tracks the Base UK Interest rate +3%. The forecast for 2010 is for UK interest rates to rise to between 1.5% and 2%, which converts into a rate of 4.5% to 5%. This ISA beats any of the fixed rate ISA's on the market, I would not be surprised if this ISA is soon withdrawn. Though remember that the 3% tracking is only for 1 year after which the rate drops to a pittance of just 0.5%, so savers will need to remember to switch on anniversary.
Self Select Shares ISA's
The stock market bottomed in March 2009 with recent analysis concluding that the bull market in stocks and commodities could continue for many more years, which opens the doors towards utilisation of the shares part of the annual ISA allowance.
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Self select ISA's are part of the UK annual tax free ISA allowance of £7,100 which comprises two components, the Cash ISA and the Shares ISA, which for the current tax year for most people is £3,600 in each part, rising to £5,100 each from 6th April 2010 (total £10,200).
Self select ISA's as the name suggests allow investors to select their own stocks and bonds i.e. they are basically ordinary share dealing accounts encased in an ISA wrapper.
All capital and income gains accrued within a self select ISA are tax free (dividends are still taxed at 10% at source).
For those that want to invest more than the component part i.e. £3,600 then if you do not open a cash ISA you can utilise the full annual allowance of £7,200 towards a shares self select ISA.
Virtually all self select ISA providers charge a small annual fee, usually a fixed amount in the range of £30 - £50 on top of dealing costs.
Summary of ISA Rules & Benefits
- The ISA accounts are TAX FREE, and do not have to be entered onto any tax returns. The equivalent taxable return on a 3% cash ISA for standard rate tax payers is 3.6%. For higher rate tax payers it is 4.2%.
- The income from tax ISA's does not count against many mean tested benefits such as Tax Credits.
- The Allowance for 2009-10 is £7,200, £3600 for cash and £3,600 for shares ISA's or £7,200 in a shares ISA. For over 50's the allowance as of 1st October is £10,200 at £5,100 for cash and shares. The new allowance will apply for all savers from 6th April 2010.
- You can only open ONE New cash ISA per tax year, and you can add new monies to One Cash ISA per tax year (see transfers). Similarly you can open only one new Shares ISA per tax year.
- You do not have to open a Cash ISA with your existing provider, i.e. you can open an account at different providers every year.
- Most providers allow for transfers in. And ALL should allow you to transfer out.
- Once you withdraw from a Cash ISA you cannot then then re-deposit into. The £3600 limit refers to total deposited, and not maximum account balance. So if you deposit £3600, and withdraw £1000, then you cannot re-deposit that £1000 in the same tax year as you have used up your £3600 deposit limit.
- To maximize your tax free interest, it is best to open your account at the start of the tax year.
- The Financial Services Compensation Scheme (FSCS) guarantees the first £50,000 per person, per institution. Those with sizable savings that total more than £50,000 should ensure that their institutions really are separate, especially given the banking crisis forced mergers.
- There is the facility to transfer Cash ISA monies into Shares ISA's but NOT from Shares ISA's to Cash ISA's .
Source: http://www.marketoracle.co.uk/Article17758.html
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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