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Last Updated: Tuesday, 6 March 2007, 17:55 GMT
Strings warning over tax-free ISA
Coins and notes
New rules next year mean investors can transfer cash into share ISAs
Financial advisers are warning people against being taken in by tax-free savings deals with strings attached.

As the end of the tax year approaches, financial institutions are offering tempting interest rates on their Individual Savings Accounts (ISAs).

However, customers in receipt of high rates are often required also to invest in other products.

ISAs are a tax-free scheme designed by the government to encourage people to save money.

They come in two forms: a bank account version known as a cash ISA and a share ISA based on stockmarket investment.

In exchange for having a cash ISA with an 8% return, Abbey customers are obliged to invest in a Guaranteed Growth Plan.

Abbey - 8%
Guaranteed Growth Plan
Alliance and Leicester - 7%
Premier Current Account
ING Direct - 6.55%
Reverts to 5.13% after 6 months

Alliance and Leicester customers must open a Premier Current Account for their 7% payout.

Whereas ING Direct reverts their favourable 6.55% rate to a lower 5.13% after six months.

Justin Modray from Bestinvest says that banks have applied this approach for many years.

"Banks and most financial institutions use a really attractive carrot on one hand to tempt people into a fairly unattractive product on the other side. You have to look at the whole package, not just the carrot," he told Working Lunch.

"You are generally much better off actually looking for the best of both breeds elsewhere," Justin added.

Kent Reliance BS - 5.71%
National Counties BS - 5.51%
Leek United BS - 5.50%

The most flexible cash ISAs offer savers instant access to their money, but even these can have catches.

National Savings and Investments has an attractive interest rate of 5.8% but there is a minimum deposit of 1,000.

Kent Reliance, on the other hand, offers a rate of 5.71% with no strings attached and a minimum deposit of only 1.

New rules by the government mean that the scheme will become simplified for its 17 million investors from next year.

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