Page last updated at 11:28 GMT, Wednesday, 31 March 2010 12:28 UK

Isas: How can they work for you?

By Kevin Peachey
Personal finance reporter, BBC News

Piggy bank
Some 11.3 million cash Isas were opened in 2008-09

The fair trading regulator is considering a super-complaint about the state of the Individual Savings Accounts (Isas) market in the UK.

There are 15 million holders of cash Isas and watchdog Consumer Focus believes they are missing out on £3bn a year of interest.

This, it says, is because banks and building societies make it very difficult to move their money when a provider drops their interest rate and this rate becomes uncompetitive.

But the British Bankers' Association says that work is already being done to make rate changes clearer to customers.

What is an Isa?

An Individual Savings Account is a tax wrapper around a savings or investment product which means that the interest you get is not taxed.

The system started in 1999 when the then-chancellor Gordon Brown suggested it would encourage people to save.

And they have proved popular. Banks and building societies now battle for custom - especially at the turn of the tax year - with high profile marketing campaigns aimed at attracting people to their Isa products.

About a third of the UK adult population have a cash Isa. They collectively have £158bn saved in these accounts.

Even at the height at the financial crisis, there were 11.3 million new cash Isas opened in 2008-09, with £28bn paid into them.

How much can I invest?

In times of low interest rates, the government wants more reward for those who have saved.

It is in the banks' interests that we do not move
Mike O'Connor, Consumer Focus

At the moment, people aged under 50 can save up to £7,200 in an Isa every financial year. Half of this can be saved in cash, with half, or all, in stocks and shares.

This limit will increase to £10,200 on 6 April, again half of this can be saved in cash. Those aged over 50 have benefitted from the new threshold since October 2009.

In his latest Budget, Chancellor Alistair Darling said Isa limits would rise in line with inflation every year.

What is the watchdog concerned about?

It says that the marketing frenzy includes banks and building societies promoting "bonus" introductory offers, or teaser rates. Some of the "best-buy" rates at the moment are hovering around the 3% mark.

The new Isa provider has up to six working days to check details
The old provider has up to 10 days to send over the saved funds. They must inform the customer of the reasons if it is going to take longer
The old provider actually has up to 30 days to sort out all the paperwork
After the funds are transferred, the customer should see the money in their new account within five working days. Interest should then start accruing within two days

After a certain period of time, usually a year, the introductory rates drop to much less competitive levels of interest.

Consumer Focus says that the average interest rate for all cash Isas stands at 0.41%.

"It is in the banks interests that we do not move," says Mike O'Connor, chief executive of Consumer Focus.

"They are very happy for us to be getting such small rates of interest. We have to push them into giving consumers better information to get a fair deal."

The best way to make your Isa savings work for you is to transfer your savings to another provider or account offering a higher rate of interest.

But consumer behaviour analyst Mintel found that only 8% of people transfer Isas to another provider, and Consumer Focus argues that the rates are unclear and it takes a long time to switch. That means anyone wanting to transfer in this financial year is a bit too late.

In fact, some of the best buys do not allow any transfers in or out of their accounts at all.

Is this fair criticism?

Banking representatives say there is good reason for such a delay. The British Bankers' Association says that lots of information has to be transferred and it is monitoring any potential bottlenecks.

It says that, from May, customers will be given advanced notification of any fall in the interest rate on a cash Isa. They will also get advanced notice of the end of any bonus or introductory rate.

It also encourages people to shop around.

How do I switch?

First of all, check that you can. You could always just open a new Isa with another provider.

Cash and hands
The handover of funds can take some time

You can only transfer existing savings from a cash Isa into another cash Isa or an investments Isa. You cannot transfer money from an investments Isa into a cash Isa.

Remember, investments - unlike savings - can go down as well as up, so be aware of the greater risks if you choose a stocks and shares product.

If you are signed up to a fixed-rate deal - such as a five-year Isa - then you may face a penalty charge if you transfer funds from this account before that period ends.

If you decide to switch, check on comparison tables for reference. When you have chosen, you need to get the new Isa provider to arrange the transfer.

The new provider may take up to six working days to check all the details, before making a request to the institution that holds your existing savings.

The old Isa manager must give the new Isa manager a notice in writing containing information and a declaration - called a "transfer history form".

Under HM Revenue and Customs, this should be done within 30 days of receiving the request but it is often quicker and if the money is not transferred within 10 days the provider must let the customer know why.

The customers will find that all this is done automatically. The new Isa manager must put the funds into the customer's new account within five working days and interest starts accruing up to two days after this.

What other issues are there?

Consumer Focus says that the names of Isas are often confusingly similar and many savers do not know the interest rate they are getting.

People tend to leave the money in these accounts, without checking if they can get a better deal.

You can call your bank and building society to find out the interest rate and when any introductory offer ends.

But customer inertia is not just a factor with Isas. People rarely switch current accounts, which has prompted the Office of Fair Trading to investigate how to promote more competition in this sector.

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