ISAs - switch accounts to get best savings rates

23 March 2010 10:02:51

Savers should compare ISAs to ensure the best rates.

A growing number of Britons are recognising the benefits of keeping their money in an individual savings account (ISA). Recent research by Halifax revealed that 37% of UK households have an ISA, with younger people adopting the accounts particularly quickly. Yet while many understand the importance of comparing ISAs to find the best savings rate when they first open an account, a significant proportion forget to keep an eye on their money and could earn little on their savings.

Making the most of tax-free savings

ISAs are important for anyone who wants to make the most of their savings, as the accounts allow Britons to earn interest tax-free. But there is little sense in leaving money in the same account for years when it could be earning even more interest elsewhere. For this reason, savers would do well to compare ISAs on an annual basis and switch to the best-rated deal they can find each year.

Savers have suffered during the recession, as interest rates have plummeted in line with the Bank of England base rate, which has languished at 0.5% since March 2009. Some people would argue that, since the vast majority of savings accounts are paying a low rate of interest, there is little point in going to the effort of comparing ISAs. However, a little research may be worthwhile, as some variable-rate savings accounts offer a bonus rate for the first year. This means that savvy savers can make the most of a high-interest account and then switch to a different ISA when the introductory offer ends and the interest rate drops.

Doing it right

Switching is relatively simple, but there are certain things to bear in mind. For instance, savers should take care not to withdraw their money from their existing ISA, as it will lose its tax-free status. Instead, they should fill out all of the paperwork associated with the account they wish to open so that the money is transferred in the correct way.

Another important step is to read the terms and conditions of the existing ISA to ensure savers do not lose out. A small number of accounts penalise customers for transferring money to alternative providers. In such instances, savers should work out how much money they stand to gain from switching and compare this against the transfer penalty to ensure that the move will be beneficial.

Finally, the timing of the transfer may also be important, depending on whether interest on the existing ISA is paid monthly or annually. Savers who receive annual interest payments may want to wait until after their payment date before switching, in order to avoid missing out on their tax-free interest.

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