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What to do when ISA interest drops?

Saving | Cash ISAs Helpful? 3

Asked by TheDrifter, submitted 15 April 2011.

Open Quote I have taken out a new isa each of the last 3 years. What I find is, in the first year the interest is very attractive then after the year is up the interest rate drops, hence me starting a new one each year. So the 3 isas I now have attract very little interest, what would you suggest I do?End Quote

Answered by Justin on 16 April 2011

This is an annoying common practice amongst banks and building societies. They offer a competitive rate at the outset, often including a temporary bonus, which subsequently declines to a paltry rate a year or two later.

The reason banks and building societies can afford to pay very tempting rates on new accounts is that they're paying pretty awful rates to the majority of their existing customers. And they hope that attracting new customers will give them an opportunity to 'cross-sell' other products and services.

Fortunately it's pretty easy to play them at their own game by moving to a better rate elsewhere once they become uncompetitive.

In your case you can transfer your cash ISAs to a new provider(s). All you need to do is choose a competitive account and ask that provider for a cash ISA transfer form, complete this and they'll handle the rest. The process might take a few weeks (banks and building societies tend to drag their heels) but it's very easy.

And when the new account(s) becomes uncompetitive just repeat the process again. The only thing to check is that your existing ISA provider doesn't charge a penalty for transferring away - rare for variable rate accounts but worth checking nevertheless.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by webwiz at 2:10pm on 18 Apr 2011:

I think it is worth stressing that you must not withdraw your money and pay it into the new ISA - or you will lose the tax free status. You must ask the new provider to arrange a transfer which can take several weeks to complete.