Time is running out for you to make use of your tax-free Isa allowance of £5,640 before the new tax year starts on 6 April. But when looking for the best cash Isa deals, should you be taking advantage or steering clear of bonus rates?
Bonuses have long been used by banks and building societies as an effective way to attract savers by boosting headline rates. Unfortunately, however, this introductory bonus disappears after a set period of time, at which point the interest on your savings can fall dramatically.
Cash Isas: best rates and bonuses
At the moment, there is only 0.25% separating the six best instant-access cash Isas. However, the top three Isas all include a temporary bonus, without which they would drop out of the best-rate tables. Both Cheshire Building Society and Santander, for example, are offering a headline rate of 2.5%, but after 12 months and 15 months respectively, the rate plunges to a meagre 0.5%.
If you know you won’t need immediate access to your savings, notice cash Isa accounts can pay a higher rate for locking up your money. However, these too can include a bonus. Coventry Building Society’s 60 Day Notice Isa, for example, pays an attractive rate of 2.8%, but this will fall to 2.2% after 12 months.
Cash Isas: bonus bugbears
Although bonus rates provide a short-term boost to your savings, 67% of Which? members surveyed at the end of 2012 strongly agreed that having to change accounts regularly to ensure a decent rate of interest is frustrating.
In fact, half of members said they think that bonuses should be removed in favour of more consistent interest rates, even if this means slightly lower rates overall.
If you’re prepared to switch regularly in order to chase the best rate, you should set yourself a reminder and move your money promptly before the rate drops off.
Fixed-rate cash Isas
If you’re happy to tie up your savings in a fixed-rate cash Isa, it’s likely you’ll be able to secure a more generous rate of interest that won’t change for the duration of the fixed-term. This can help to avoid the hassle of regular switching when a bonus ends.
However, as savings rates have plummeted over recent months, the positive correlation between longer fixed terms and interest rates is not as strong as it was. In fact, the best-rate two-year cash Isa available at the moment pays the same rate as the best instant-access deal.