Make the most of your Isa allowance

• Featured Articles
• Published: 22 Jan 2010 in Money and Savings

By Esther Shaw

With a new Isa season approaching, many savers will be looking for the best accounts in which to stash their hard-earned cash.

This is particularly important given that not only are interest rates at record lows, but banks and building societies have also switched their focus back to lending - in a bid to attract new borrowers.

As a result, many are reducing mortgage rates while cutting the rates they offer to savers - in order to maintain their balance sheets.

Nonetheless, things could be about to pick up for savers in the individual savings account (Isa) arena, as providers battle it out to attract savers' tax-free allowances in the forthcoming Isa season.

An Isa is a no-brainer

When it comes to saving, an Isa should always be your first port of call as you can earn interest on your nest-egg tax- free.

You can currently stash up to £3,600 in a cash Isa each financial year - rising to £5,100 for those aged over 50; younger savers will have to wait until the start of the new tax year for their allowance to increase in line with this.

What to look for

When choosing an Isa, it's worth checking on the relative minnows of the financial world, as some of the top rates are currently being offered by building societies.

You also need to choose between easy access, notice and fixed-rate accounts.

If you know you won't need to get access to your funds, consider a fix, as these tend to pay higher rates than variable accounts.

As a general rule, the longer the period you are willing to fix, the higher that rate will be.

Check on transfers

Before signing up, it's worth finding out whether you can transfer funds from your existing account into the account paying the better rate of interest, as while many will allow this, some will not.

It's also crucial to remember that to protect the tax-free status of your money, you should never withdraw cash from an Isa to invest in another account.

Instead, you should contact your provider who will then arrange for the money to be moved across from your existing account for you.

Further, you also need to check whether the Isa has restricted eligibility - such as existing customers or over-50s only - or other “strings attached” such as limited withdrawals or bonuses.

A bonus, for example, may boost a headline rate, but you may find an account is no longer attractive once that bonus expires.

Top easy access and notice Isas

Standard Life is currently paying 2.65 per cent on its Isa which has neither a bonus nor a notice period if you want to withdraw funds.

Elsewhere, Manchester building society is paying 3.01 per cent and Newcastle building society is paying 3 per cent, but both of these include a bonus of 1 per cent for 12 months, and a notice period - of 60 days and 120 days respectively.

Nonetheless, the great feature of each of these accounts is the fact they all permit transfers in from previous years' Isas.

Top picks if you want to fix

If you're looking for a fixed rate Isa, the Bank of Cyprus UK is paying 3.33 per cent on its one-year bond, while Nationwide building society is paying 3.5 per cent on its two-year bond; both accounts permit transfers in.

Savers happy to tie up their funds for the longer term can currently earn 4.25 per cent on a four-year bond with the Halifax, while Leeds and Nationwide are paying 4.6 per cent and 4.5 per cent respectively on their five-year deals; all three permit transfers in.

However, you need to think carefully before committing to a long-term fixed-rate Isa, as if interest rates go up quickly, your deal could soon become uncompetitive.

Don't miss out

Given that Isas offer such good value for taxpayers it's important to make full use of your allowance, so don't delay - get saving right away.

Notes: Rates correct as at 20/01/10