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Fuss over Cash ISAs

Saving | Cash ISAs

By Justin Modray, published 31 March 2010.
Helpful? 1

There’s been a lot of fuss in the news today over cash ISAs. Consumer Focus, a (mostly) government-funded consumer body has lodged a ‘super-complaint’ with the Office of Fair Trading (OFT) arguing that 15 million cash ISA holders could be losing out in interest worth up to £3 billion a year because of the way the market operates.

The thrust of the complaint is that average rates of interest on cash ISAs have been falling further than conventional accounts, there have been delays on transfers and some best-buy accounts don’t even accept transfers.

For all the good it will do, remember the OFT lost the fight to investigate ‘unfair’ bank charges, I’m glad Consumer Focus have generated some publicity over these issues.

However, they’re hardly a surprise. Anyone with their eyes half open knows that banks routinely attach temporary bonuses in order to propel accounts into the ‘best buy’ tables without costing them a fortune long term. This wins new customers to try and sell other products to and is usually very profitable, as when the bonus falls away and customers end up earning next to nothing many don’t bother moving elsewhere.

Why do banks appear to be using this practice more eagerly on cash ISAs versus conventional accounts? My guess is simply because it’s more profitable and they can get away with it. The ISA markets have historically been very competitive for new business, so banks have tended to add bigger bonuses or offer higher standard rates to win customers – meaning a bigger thump when the rates fall back down to earth.

Dragging their heels over transfers is inexcusable. HMRC rules, while woolly, suggest ISA transfers should be completed within 30 days. If your transfer takes longer then demand the lost interest and, if that fails, take your complaint to the Financial Ombudsman Service.

If you have a variable rate cash ISA (or savings account for that matter) review the rate at least once a quarter and don’t hesitate to transfer elsewhere. You simply need to complete an ISA transfer form with the new provider then sit back and wait, hopefully for not too long…

P.S. Apologies for fewer than usual updates on the site this week, been busy behind the scenes preparing the site for the new tax year next week – the introduction of a 50% tax band is a pain as lots of the calculators require changes.

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Comment by rafferty at 6:19pm on 01 Apr 2010:

As the whole point of cash ISAs was that they should be portable, it's a little ironic that the NS&I Direct ISA doesn't allow transfers in from other providers.

If all providers were the same then ISAs wouldn't be portable.