Cash ISA Discussion/Question

hornblower

When comparing interest rates on savings, one should compare the AER (Annual Equivalent Rate) and not gross or net rates.

Comparing gross/net rates does not give the entire picture because as you said, if two accounts have the same gross rate but one pays interest more frequently than the other, then the one that pays interest more frequently would effectively pay you more due to compound interest.

The AER is the rate that an account would pay if any interest paid during the year was compounded and paid just once a year.

Regarding the Abbey Postal ISA (which I myself transferred to last week), any interest earned should be paid straight into the ISA, unless you have specified that it be paid into another account.

With regards to the 'best deal' available to you, it depends on what whether you pay income tax and what your long term plan is.

Assuming you don't pay income tax: if you expect to withdraw most or all of the balance in the short term (i.e. within a year), then the main factor is the interest rate. If however you want to put away your cash for the medium or long term then an ISA may be more suitable since everybody over 16 has an annual allowance of £3000 cash to put into an ISA and if it is not used up then that's it. If you pay income tax in the future then your cash will be protected.

Assuming you do pay income tax: again, if you plan to take the money out relatively soon then the interest rate would be most important. Remember that the net interest rate would apply and this would most likely be lower than the rate for a Mini Cash ISA. An ISA seems even more favourable in this case, since it would be likely to have a higher interest rate and would also shield the cash from the taxman.

If you are planning to deposit a lump sum greater than your ISA allowance for the financial year (£3000) then it may be wise to put as much as you can into an ISA and put the rest into a high interest savings account. Find the best rate for this at http://www.moneysupermarket.com but remember that if you don't pay tax then you must notify the provider and fill in an R85 form.

matthammal

My wife had an Alliance & Leicester mini cash isa. We went into her branch to arrange a transfer to a Smile isa. They told us that there was a £25 charge for this transfer?

I thought all ISA's were penalty free? Or is it just CAT standard iSA's that are penalty free?

isasmurf

Only CAT standard cash ISAs (or stakeholder Cash ISAs after April) are guaranteed to be free from charges. Non-CAT standard ISAs may charge a fee, but you'd need to check the terms & conditions of the particular ISA.

tomgoldsmith

why doesnt marks and spencer register amongst the top mini cash isa providers

scootermacc

Hey Hornblower, thanks for the useful info - you sound like you would be able to work out a connundrum...

Do you know how to (easily) work out whether I'd be better off transferring an existing £3000 in an ISA to with a better rate, or alternatively putting it into an Offset account for my mortgage instead?

Is it a simple case of comparing mortgage rate against ISA rate, or is there more to it?

I've seen a few articles suggesting this would be more moneysaving, but there was no explanation of how to calculate which was better.

I can't find any info about this on Martin's site...

Thanks in advance.

Kazza242

tomgoldsmith wrote:

why doesnt marks and spencer register amongst the top mini cash isa providers

M&S' mini cash isa no longer features in the best buy tables because it is no longer offered to new customers. It was withdrawn last summer. At 5.25%, existing customers are still getting an attractive rate.

ikr2

I notice that my IF mini cash ISA has dropped it's rate to 5.00% AER. The A&L one looks attractive at 5.4% AER, but has a £25 fee for transferring out.

The Abbey Postal ISA looks the next best at 5.35% AER. with no fees My main requirement is the need to make timely withdrawals of cash whilst saving a regular amount each month.

It looks like this ISA comes with a cheque book - so that would cover the withdrawals requirement.

And I can set up a direct debit to save money into the ISA.

Have I missed any catches? The only possible prob I can see is that "The Postal ISA interest rate is guaranteed to be a minimum of 0.50% above the Bank of England base rate until 1st April 2005."

simonkirkland

Have you thought about the First direct isa? It's 6.25% until October and I can't see anything to stop you withdrawing it then and moving it to something better (It's CAT standard so no fees). There is a bit of a question about transferring existing ISAs at the minute which knowbody had given a straight answer to yet. It might be that you can only transfer £3000. I've got my application and transfer forms on the way so we;'ll see what they say.

Simon

t_i_g_e_rr

The interest rate for the Abbey ISA is 5.35%. The interest rate for the A+L ISA is 5.4%, but has a £25 transfer charge where the Abbey ISA doesn't. If I assume that I will need to transfer my ISA after 12 months to the new best player (a good money saving principle), I have calculated that the extra 0.05% is not worth it!

To cover the £25 transfer charge I would have to have £50,000 in my ISA (50,000 * 0.0005 = 25). If you began your ISA in 1999 and paid £3000 a year in at 5% interest each year, you would have less than £25,000 in your ISA this April; not even close.

Therefore, if my assumptions/calculations are correct, I should go with the Abbey ISA (if anyone can see a mistake, please let me know).

Fifer

tomgoldsmith wrote:

why doesnt marks and spencer register amongst the top mini cash isa providers

Because it's closed to new customers, according to their website? They only appear to sell non-cash ISAs to new customers.