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Personal Finance: Best Cash ISA for End of Tax Year Last Chance

Whilst George Osbourne prepares to mask Budget 2012 tax rises by means of the stealth Inflation tax on indexation of allowances, against which one of the primary ways savers have to protect the value of their wealth against inflation theft is via Cash ISA's, for which the deadline deadline for utilising 2011-2012 allowances is imminent (5th April 2012) therefore this is your last chance to use it or lose.

The market interest rates have been continuing a trend towards normalisation which is resulting in a uptrend in interest rates as the market is further breaking away from the UK base interest rate of 0.5% that to all intents and purposes is irrelevant for all UK retail customers where even the best mortgage rates charged can be at least eight times higher and now the same holds true for the ISA market as new fixed rate ISA's illustrate.

Beware of Tricks Banks and Building Societies Play on ISA Savers

One of the biggest tricks that the banks and building societies tend to play against ISA savers is to offer a lower interest rate on ISA's than similar non ISA saving accounts, therefore wiping out virtually all of the tax free benefits of a Cash ISA account for basic rate tax payers.

Beware of price comparison sites, they tend to offer what pays them commission and not necessarily the best rates available.

Act fast to meet the deadline for applications for 2011-12, especially for applications as new customers.

Best Instant Access ISA's

Financial Institution Interest Rate Minimum Comments
AA ISA 3 3.50% 2,500 Up from 3.05% for ISA2, Does not allow transfers in. Includes a 3% bonus for 12 months.
Santander 3.30% 2,500 Allows transfers in, includes a 2.8% bonus for 12 months
ING Direct 3.00% 1 Does not allow transfers in. Rate guaranteed for 12 months.

Best Current Fixed Rate ISA's (1 Year)

Financial Institution Interest Rate Fixed Period Minimum Comments
Santander 3.5% 1 Year 2,500 Allows transfers in. Early withdrawals allowed subject to 90days loss of interest.
Metro Bank 3.25% 1 Year 1 Allows transfers in. Early withdrawals allowed subject to 180days loss of interest.
Aldermore 3.2% 1 Year 1000 Allows transfers in, small bank.

Best Current Fixed Rate ISA's (2 Year)

Financial Institution Interest Rate Fixed Period Minimum Comments
Santander 4% 2 Years 1 Allows transfers in. Early withdrawals allowed subject to 120days loss of interest.
Halifax 3.7% 2 Years 500 Allows transfers in. Early withdrawals allowed subject to 180days loss of interest.

Which ISA ?

Santander has been a busy bee by raising rates on its ISA's by typically 0.5% from just a few weeks ago, these rate hikes are indicative of a market that is hotting up as the UK retail loans and savings market further detaches itself from the irrelevant Bank of England's base rate.

The best instant access is from the AA. However, it does not allow transfers in, the best for consolidating your existing instant access and maturing ISA's into one account is Santander. Which is something savers should seek to do as larger balances can attract higher interest rates (stay within banking group compensation limits).

Of the 1 year fixed rates, Santander tops the market, with the Santander 2 year 4% fix which beats official inflation at 3.6% (Jan). Longer-term fixes are available, for instance BM Savings offers 4.25% for a 5 year fix, but this rate compares against their 5 year non ISA bond which pays 4.65% which illustrates the trick of under paying Cash ISA savers, which over 5 years would amount to a very significant difference in interest paid.

The bottom line is that market interest rates are on the rise as a consequence of the trend towards normalisation of the UK interest rate market as opposed to the artificial market the Bank of England has been engaged at manipulating as a consequence of its primary objective which is to prevent financial armageddon. A normal interest rate market would tend to pay savers on instant access accounts more than the rate of Inflation which is 3.6% CPI, and RPI 3.9%, which implies a normal interest rate of at least 4% so we are still at least 0.5% away from the best minimum rate a normal market would be offering, so plenty of scope for a further 0.5% rise in the market savings interest rates over the coming months regardless of the the base rate staying at 0.5%.

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 2011-12 is 10,680, 5,340 for cash and 5,340 for shares ISA's or the whole 10,680 into a shares ISA.
  • 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 5,340 limit refers to total deposited, and not maximum account balance. So if you deposit 5,340, and withdraw 1000, then you cannot re-deposit that 1000 in the same tax year as you have used up your 5,340 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 85,000 (Euro 100,000) per person, per institution. Those with sizable savings that total more than 85,000 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 .
  • Next years Cash ISA allowance (2012/13) will increase inline with inflation to 5,640.

By Nadeem Walayat

http://www.walayatfamily.com

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