Investment Comparison - Six Cash ISA Ripoffs
The six cash Isa rip-offs that need fixing Sylvia Morris, Money Mail 31 March 2010, 9:21am Money Mail has campaigned tirelessly on behalf of cash Isa savers in the face of consistently appalling behaviour by banks and building societies. Now, as the Office of Fair Trading launches an investigation into their behaviour, our savings expert Sylvia Morris lifts the lid on the cash Isa rip-offs.
1. Transfer Hold-Ups
When Isas were launched in 1999, they included rules that were supposed to make it simple for savers to transfer to more competitive products as they became available. But from day one banks and building societies have manipulated these rules to their own ends. Some have imposed cash penalties and deducted interest for transferring; others have relied on a sluggish, chaotic and outdated paper transfer system. Under HMRC rules, providers have 30 days to arrange an Isa transfer following a request to move out - so savers can lose access to their money during this time. Moreover, the industry's own guidelines state transfers must not take more than 26 working days. Now that interest rates change frequently as banks and building societies vie for High Street savings, delays can mean savers miss out on the rate that attracted them in the first place. So great was the mess that in 2008 Money Mail launched a campaign highlighting the traumas savers were forced to endure.
2. Penalising Loyalty
Fear of moving means many savers feel trapped with their bank or building society, and they exploit this fear. And while they tempt in new savers with top rates of as much as 3.5%, loyal savers can earn as little as 0.05%. Research from financial analyst Defaqto reveals 50 leading providers pay less than base rate on a £3,600 deposit on their cash Isa accounts. Some banks ban their loyal savers from moving their cash Isa money into their top deals. Banks do not have to accept transfers into their cash Isas - it is up to them whether they do so or not. Marks & Spencer, part of HSBC, pays 2.65% to new savers, but will not let those in its older Tracker Isa, paying 0.5%, move into it. Barclays' latest account, Golden Isa 2, pays 3.1%, but will not accept transfers in. But the rates of some of its older accounts pay much less. Its Tax Haven, launched in March 2008, pays 0.83% and in Tax Beater (2007) the rate is 0.56%. Savers in its Cash Isa, still open to new savers, earn just 0.1%. Similarly, Santander pays 3.5% on its Flexible Isa and 3.2% on its Flexible Isa 2, the best easy access deal on offer. But customers who already have a cash Isa cannot transfer that money in - and they may be earning as little as 0.1%. There are a string of further Isas, including those from Alliance & Leicester, Barclays, Cheltenham & Gloucester, Santander, Halifax and HSBC, which pay between 0.05% and 0.2% to loyal savers but much more to new ones. Santander paid me just 0.1% interest Sara Ford is shocked that her Isa - taken out in 2004 - has paid so little interest over the past year. She earned just £22.87, down from £600 over the 12 months to March 2009. The account changed name from Abbey Postal Isa to Santander Easy Isa and now pays a pathetic 0.1% on balances up to £27,000 - or £1 on each £1,000 you have in the account. Six years ago, the account paid an attractive 4.6%, when base rate was 4%. 'I knew it would be bad because interest rates have fallen,' says freelance travel journalist Sara, from Tonbridge, Kent. 'But just £22.87? it wouldn't even buy me half a tank of petrol. it was certainly not highlighted that it paid such a low rate of interest. I am transferring it elsewhere.' Santander, which owns Abbey, pays up to 3.5% to new savers and guarantees that their rate will be three percentage points over base rate for the first 12 months.
3. The Name Game
Banks and building societies often launch new Isa accounts at the end of the tax year to woo new savers. At the same time, they hope existing savers won't notice that they are not in the account which comes with headline rates. They do this by using a very similar name. Santander has six different issues of its Direct Isa. The latest, Issue 6, pays as much as 2.75%, but its older closed versions pay as little as 0.15%. Alliance & Leicester, part of Santander, has a similar string of closed accounts. Its Direct Isa issues 1 to 3 pay as little as 0.1%, while it advertises up to 2.75% to new customers. Lloyds TSB pays 0.9% or 1.4% depending on your balance in its Cash Isa, but as much as 2.5% on its newer Cash Isa Saver. Birmingham Midshires has a string of closed accounts called Direct Isa paying between 2.1% and 1.5%, depending on when you took them out. Even worse, if you are in Direct Isa 1 or 2 you earn 2.1% if you opened it with new money, but a lower 1.75% if you transferred your Isa money in from another provider.
4. Date Confusion
Even more muddling for savers, some pay a different rate of interest depending on when you opened an account. Lloyds TSB Cash Isa Saver is currently offering 2.5%, including a bonus. But if you took out this account between October and February 20, your rate is a lower 2%. C & G pays 2.7% on its cash Isa to savers who opened an account from March 8, but only 0.05% to those already in the account. They wouldn't let me swap to best account Retired personnel manager Chris Green is being paid just 0.2% by First direct - as are other customers who have been with the bank for over 12 months. It pays 2.75% to new customers but will not allow its loyal customers to switch into the account. Chris, from Bristol and his wife Sally, pictured, have transferred isas before without a hitch. But they are still wary that there's a chance it might not work. Chris says: 'It annoys me that banks treat long-term customers poorly and favour new customers. it used to be the other way round. They rely on inertia and hope that savers will sit in their poor accounts. I am constantly looking at rates to make sure we earn a decent one.'
5. Baffling Bonuses
Top-paying accounts generally come with a bonus paid for the first 12 months - allowing marketing men to advertise top rates of interest. Money Mail has identified more than 100 accounts closed to new savers, some of which paid big bonuses but which now pay just pennies in interest. Banks and building societies currently do not have to write and tell you when your bonus runs out. With some, your bonus runs to a specific date - but this can differ within the same 'issue'. Alliance & Leicester Direct Isa 5 has bonuses running to April 5, May 10, July 1, august 31, October 31 and December 31 - and when yours runs out depends on when you took out the account. If you took out a Barclays Golden Isa between its launch date on March 9 last year and May 31, you qualify for a 1 percentage point bonus for a year. If you opened it later, you don't qualify for the bonus and earn 2.58%.
6. Tax Thieves
One issue not listed for investigation so far is how some banks and building societies pay much less interest on their easy access cash Isas than on their taxable deals. Savers are doubly caught. If they attempt to transfer, they fear their money will be stuck in limbo. If they abandon the Isa, then their interest will be taxed. Savers in Halifax's taxable Guaranteed Saver earn 0.5% before tax or 0.4% after basic rate tax. But those in its branch-based Isa Saver are paid a much lower 0.1%. By using the supposed tax-break, they are worse off because they are paid £10 for every £10,000 in their cash Isa and £40 after basic rate tax in Guaranteed Saver. Even a higher-rate tax payer will earn £30 in the taxable account. At Santander, savers can earn 2.5% in a taxable account, but as little as 0.1% in its cash Isa. C&G, part of Lloyds TSB, pays as little as 0.05% to some savers in its easy access Cash Isa, but 1.9% before tax to those in its taxable Cheltenham Gold. Among those which pay less on fixed rate cash Isas than on their taxable bonds are Halifax, Lloyds TSB, C&G and northern Rock. northern Rock pays 3.15% fixed for one year on its taxable one-year bond, but 0.4 percentage points less on its cash Isa. Basic rate taxpayers earn 2.52% on its taxable bond and 2.75% on its cash Isa. The difference means cash Isa savers get less than half the tax benefit they should from the Isa, while taxpayer-owned northern Rock snatches the rest. even worse, Lloyds TSB pays 2.7% up to £15,000 on its two-year fixed rate Isa, but 3.5% on its bond. even after tax, those in its taxable bond are better off. at Halifax, savers in its taxable bond earn 4% before tax, but only 3.75% on its Isa. Since Money Mail launched its Stop! Isa Thief campaign, some banks and building societies are now paying the same rate on their cash Isas as they do to savers taking out their taxable fixed-rate bonds. Last month, Nationwide changed its ways to pay the same rate to both types of saver. Santander now pays 3.5% on its two-year fixed rate cash Isa run through the post - the same rate as it pays on its two-year bond taxable on £10,000 or more.
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