Money news, advice and predictions for savers and spenders.
By Jeremy Gates
Many patient savers who have been tucking spare cash into tax-free Individual Savings Accounts have emerged as sacrificial victims in the last year, as building societies slashed interest rates.
One moment, my Kent Reliance BS ISA paying 5.21% was a world-beater. Fourteen months later, it offers a feeble 0.72% - and 38 other cash ISAs now pay a paltry return of less than 1%.
Yet when ISAs started in April 1999, as Gordon Brown's version of the TESSAs introduced by then-Chancellor John Major back in 1990, they were highly-attractive savings accounts with the tax shelter as the icing on the cake.
So I, for one, was not entirely surprised when Lloyds Banking Group found that most over-50s haven't got a clue about changes to ISA limits taking effect on October 6.
Lloyds research revealed that two-thirds of the over-50s do not understand changes spelt out in this year's Budget.
In fact, Chancellor Alistair Darling announced that the total annual ISA limit will rise from £7,200 to £10,200. The cash element rises from £3,600 to £5,100, with the other £5,100 devoted - if required - to equities or bonds.
Investments such as cash, equities and bonds held within an ISA wrapper avoid all tax on capital gains, and usually on income too. Interest on a cash ISA is tax-free and not even mentioned to the taxman.
Of 220 cash ISAs available, around a third are fixed rate, with a given maturity date, and the rest are variable rate. Poorest rates are mostly on variable-rate ISAs with instant access.
However, Darling is creating some confusion by allowing around 11 million over-50s - born on or before April 5, 1960 - to enjoy the new ISA limit from October 6. Everybody else must wait until April 6, 2010.
The snag is that savers can only hold one ISA with one institution in any one tax year.
Some ISA providers, notably smaller building societies with less sophisticated computer systems, are finding it difficult to raise the ISA limit in mid-year for savers who invested earlier in this tax year.
"It is a bit of a mess, with many providers yet to make plans entirely clear, says Andrew Hagger at Moneynet.co.uk.
"Perhaps the best response so far has been by Yorkshire BS, which allows fixed-rate ISA savers to put in extra money at the original rate since closed to other business."
Other ISA providers allowing top-ups on similar terms as those allowed earlier in the year include all brands in Lloyds Banking Group - Halifax, Lloyds TSB, Scottish Widows, Bank of Scotland, C&G - plus Britannia, Leeds BS and Coventry BS.
"The second scenario is that providers will let savers top up their accounts, but at a new rate, usually lower, than the rate paid on money invested earlier in the year," says Hagger.
"Usually, ISA rates are more generous in the early months of a financial year, when providers chase new business.
"The third scenario is one of uncertainty: the providers who have yet to announce exactly what they intend to do."
Suddenly, cash ISAs seem to be getting complex. But they are still vital to those who want to put money aside for long-term security.
As private-sector pensions crumble, ISAs look increasingly attractive as a long-term savings option. Unlike pensions, every penny invested in a cash ISA can eventually be withdrawn and spent.
Hagger estimates that any saver who has ploughed the maximum into TESSAs and ISAs since 1990 is sitting on a lump sum of £44,700 - plus interest. That really is equivalent to a second pension, particularly for thrifty couples who have doubled it.
But perhaps the strongest case for ISAs are the massive tax increases which will be needed soon to plug the gaping holes in our public finances.
The Government, either Right or Left, can hardly destroy the tax shelter it created, and will presumably not reduce the annual limit now being increased - but it will try to squeeze as much revenue as possible from other savings and investment products.
More than £170 billion sits in cash ISAs: £60.5b with building societies, £105b with banks and just over £5b with National Savings and Investments (NS&I).
So what cash ISA should savers choose in these market conditions?
Though rates on five-year fixes peak at 4.60%, Hagger advises a fix for only one or two years.
On fixed-rate ISAs, best deals include Principality BS at 4.20% over three years, with both Alliance & Leicester Nationwide at 3.50% over two years. Among five-year fixes, Leeds BS offers 4.60%, with Norwich & Peterborough BS at 4.55%.
Michelle Slade at Moneyfacts.co.uk advises checking terms and conditions carefully before going into any fixed-rate deals.
"Some allow no access at all, others only allow it after charging a penalty," she says.
On easy-access accounts, Manchester BS has an ISA with a 35-day notice period paying 3.01%, including 12-month bonus of 0.7%. First Direct offers 2.96% on an e-cash ISA, but that includes a variable bonus of 2.76% until November 9, 2010, when the rate slumps to a miserly 0.2%.
Without bonuses, the best easy-access ISA is probably Buckinghamshire BS at 2.80% (180-day notice), followed by Intelligent Finance at 2.75%. You only need a £1 deposit to open a Standard Life Bank Direct Access ISA (2.65%).
Newcastle BS has launched the MaximISA to help over-50s investors to consolidate cash savings from October 6. It offers a two-year fix at 3.25% on minimum £500 deposits, with 120 days' notice or 120 days' loss of interest if withdrawn ahead of maturity.
Kevin Mountford, head of banking at Moneysupermarket.com, urges long-term ISA savers to monitor existing accounts too.
"Our research shows that savers who used their full cash ISA allowance for the past 10 years, rather than swapping to the top product, have lost out on an extra £3,290 of tax-free cash," he says.
Mountford thinks a third of over-50 savers never switch savings accounts, and could have money languishing in poor paying accounts.
"Savers have to respond actively to the market," he says. "When rates are falling, your account will suffer cuts. When they are rising, there may be better accounts out there than the one you already have.
"But as long as you are working, and are a taxpayer, then ISAs are really the first port of call for savings."
Too often, though, laziness creeps in. Around a quarter of over-50s savers never even bother to check existing rates, he says, so they may miss out on good rates.
In this climate, it is important to switch money to better-paying accounts, or even to new providers.
"Banks and building societies have started to get their acts together, and most now provide electronic transfers, making switching a pain-free experience," Mountford says.
"Most accounts also allow you to withdraw cash without any loss of interest or tax implications should you need money at a later stage."
Finally, what's the 'best buy' ISA from Lloyds Banking Group, which uncovered our great ISA inertia?
Lloyds' fixed-rate cash ISA pays up to 3.2% on balances above £30,000, £3% on £9,000-plus and 1.5% on balances from £3,000 to £8,999. Clearly, Lloyds wants to round up all your cash ISAs from other providers.
Halifax, however, needs a minimum deposit of only £500 for its fixed rate ISAs, available from one to four years.
:: Information: Financial websites have a league table of 'Best Buy' cash ISAs, while you can also compare rates on www.fsa.gov.uk.
Newcastle BS (0845 600 4331 and www.newcastle.co.uk); Lloyds Banking Group (0800 015 0060 and www.lloydsbankinggroup.com); Halifax (0845 601 8150 and www.halifax.co.uk).
Poundnotes
:: In uncertain times, bond rates over two, three and five years are attractive in relation to Bank base rate of 0.5%. Nationwide BS pays 3.25% over one year on £10,000-plus, while Yorkshire BS offers a three-year fix at 4.65% gross and a five-year fix at 5.30% gross, on a minimum £100 deposit.
Meanwhile, Bradford & Bingley offers a two-year bond of 4.35% gross (3.48% net) on minimum £10,000 deposits paying annual income. For monthly income, the rate is 4.27% gross (3.42% net).
Chris Edwards at Yorkshire BS says: "As these new bonds can be opened online, in branch or over the telephone, we expect a great deal of demand. People should act quickly if they don't want to miss out on these great rates."
Michelle Slade at Moneyfacts.co.uk says average bond rates have fallen since January 2009 on one-year bonds, from 3.62% to 3.11%.
But they have risen strongly on two-year bonds (3.37 to 3.73%), three years (3.46% to 4.03%), four years (3.64% to 4.21%) and five years (3.33% to 4.61%).
Slade says investors like two and three-year bonds.
"Despite the highest rates on four and five-year bonds, savers don't appear to be tempted," she says. "They are concerned that, if rates increase, their money will be tied in accounts which are uncompetitive in the future."
Enquiries: Yorkshire BS (0845 120 0100 and ybs.co.uk); Nationwide BS (08457 302010 and www.nationwide.co.uk); Bradford & Bingley (www.bradford-bingley.co.uk) is now part of Abbey.
:: Personal loan providers are busily tweaking rates upwards, claims Louise Bond, personal finance expert at price comparison service uSwitch.com.
Since September 1, Marks and Spencer has increased selected rates by 1.2%, Egg has upped the rate on £3,000-20,000 advances by 1% to 14.9% and Alliance & Leicester has lifted the rate on £5,000-£7,499 by 0.1% to 8.9%, and by 0.8% to 8.7% on £7,500-15,000 advances.
The good news is that nervous lenders are reserving best rates for existing customers, because they can closely monitor their financial behaviour.
"Last year 1.3 million customers used an unsecured personal loan to debt consolidation purposes," Bond says.
"However, with the number of personal loans dropping by 37% this year and rejection running high, it would be highly unlikely that a similar number can consolidate their debts this year."
:: Around 35 million payment protection insurance (PPI) policies have been sold alongside loans, mortgages and credit cards, designed to pay out if policyholders fall ill or lose their jobs - but a Government inquiry has concluded that many of them were mis-sold.
In those cases, borrowers can make claims for premiums to be repaid, even on loans repaid up to six years ago,
Sally Bowyer, managing director of claim specialist Brunel Franklin, says compensation can be vital for households struggling to cope.
Brunel Franklin operates a 60-second test to assess if your claim is likely to succeed, and may take up your case on a 'no fee' basis. It takes 25% of any eventual award.
The biggest award the company has won was £27,000 for a couple originally offered £3,000 to drop their claim.
Enquiries: 0800 051 5451 and www.brunelfranklin.com.
:: Don't get carried away by the storming advance of shares on the London market. Andy Parsons, at The Share Centre, suggests cautious investors who want some exposure to the market might look closely at the Schroder Income Maximiser Fund, where manager Thomas See looks capable of meeting a 7% yield target for the fourth consecutive year.
The fund's top-five holdings are GlaxoSmithKline, Barclays, Rentokil, Vodafone and AstraZeneca, and Parsons thinks it is nicely placed to shrug off rises in interest rates, if and when they eventually arrive.
The Share Centre launched its Platinum 120 funds range in June 2009 to keep costs down for small investors.
Enquiries: 01296 414 141 and www.sharecentre.com.
:: High-five savers:
Phone No Rate Account Period Deposit Interest paid
Aldermore 01372 736700 5.40% (F) Fixed Rate Bond Five Year Bond (P) £10,000 Qly
Yorkshire BS www.ybs.c.uk 5.30% (F) eBond 31/12/14 £100 Yly
First Save www.firstsave.co.uk 3.25% 90 Day Notice 90 Days £5,000 Yly
Chelsea BS 0800 678 3885 3.10% Call Direct 120 120 Days £1 Yly
Manchester BS 0161 923 8015 3.01% Premier ISA 35 Issue 1 35 Days £1,000 Yly
:: Top-five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC (Rem) 0800 494999 1.99% discounted for two years 60% £1,199 Yes
First Direct (Rem) 0845 610 0100 3.14% variable for term 75% £699 Yes
Co-operative Bank 0800 633 5286 3.24% to 30/09/12 75% £995 Yes
ING Direct (UK) 0845 603 8888 3.29% for term 75% £595 Yes
Leek United BS 01538 380047 3.59% to 30/11/11 75% £799 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
