Is it time to switch your Isa?

With interest rates remaining at rock bottom, more than a million savers are earning just 0.1% on their cash ISAs. So what can you do to get a better deal on your savings? And should you give up on ISAs all together? Ruth Jackson explains.

How much interest is your Isa earning?

Unless you just opened your account, chances are you don't know the answer to that question. But you should find out. More than 1m savers are earning just 0.1% interest on their cash individual savings accounts (Isas).

You may think that can't be you, because you would never have opened an account paying such a paltry rate of interest. But the interest rate you signed up to may not be the one you're getting now: there are a number of reasons why your interest rate could have plummeted.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Anyone who opened variable rate Isas will have been hit by the fall in the Bank of England base rate, for example. This has been sitting at 0.5% since March 2009. That's bad enough, but it is also worth remembering that many variable rate accounts pay a bonus rate for the first year before reducing the actual rate to almost nothing.

Savers who opted for fixed rate Isas several years ago will also need to double check their accounts: if your fixed rate has ended and you haven't shifted the money, it has probably been switched onto a new, and utterly dismal, rate.

How dismal? Very. Some Cheltenham & Gloucester Isa customers are getting just 0.05% in annual interest that's a return of £1.80 a year on a balance of £3,600.

Should you give up on Isas altogether?

There are some standard savings accounts out there that are offering higher interest rates than Isas. So should you abandon your Isa? According to, the top one-year fixed cash Isa is from Bank of Cyprus UK, paying 3.33%. But the best taxed savings deal out there - with Firstsave - pays 3.65%. That sounds tempting. But don't jump in.

Once you factor in the tax, the rate falls right back down to a return of 2.92% for basic-rate taxpayers, and 2.19% for those on the higher rate. And even if you found a standard savings deal paying much more than that, don't forget that if you withdraw your Isa money you can only reinvest up to your annual Isa allowance (£3,600 at present, unless you are over 50, in which case it is £5,100): the tax breaks on anything over that will be lost forever. So, overall you are probably better off leaving your savings in Isas and getting the best tax-free rate of interest.

Enjoying this article? Sign up for our free weekly email, MoneyWeek Saver, to receive free weekly personal finance tips and insight direct to your inbox from our expert, Ruth Jackson. Sign up to MoneyWeek Saver here

What can you do to improve your return?

Obviously, you need to check your rate and see if you could improve it by switching to another Isa. But be careful how you do this. Don't just withdraw your money it loses its tax-free status if you don't do things properly. First make sure the new Isa you want accepts Isa transfers, and then fill out the proper paperwork to transfer the money.

The best rate available for Isa transfers is with Leeds Building Society - 4.6%. However, to get that you have to lock away your money until 2015. That's probably not a good idea right now: with base rates at rock bottom the only way is up, something that means the Leeds deal might not look so good in, say, 2012.

Instead, opt for a short-term fixed rate. These pay more than the variable rate Isas, and if you only lock in for one year you are unlikely to be left behind by new deals. The best short-term rate available for Isa transfers is 3.33% with the Bank of Cyprus UK's one-year bond. Otherwise, there is Ipswich Building Society's Fixed Rate ISA 10 which is offering 3.25% and matures on 31/10/2011. Those with large amounts to transfer should note that the Ipswich Building Society Fixed Rate Isa 10 pays 3.5% interest on balances over £20,000. Unfortunately, this account is limited to savers living in certain East Anglian postcodes.

However, I suspect that your best bet might be to stick with your bad interest rate a little longer. With the end of the tax year looming and thus this year's Isa deadline the banks will start releasing new deals. In the run up to 6 April, if competition kicks off like it usually does, much much better rates will appear. So wait a little bit longer and seize one of the higher rates on offer at the end of March.

This article is taken from our weekly MoneyWeek Saver email. Sign up to MoneyWeek Saver here

Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.