Avoidthe ISA trap

Beware banks and building societies that promise tax-free bonanzas then lower the rate later, warns Alison Brace

T he ISA season is upon us. Banks and building societies are imploring us to plonk our hard-earned cash into tax-free savings accounts before the financial year ends on April 5.

There, it will make more money for us and we won't have to pay tax on the interest. But beware. All is not as it seems. When it comes to cash ISAs, it really is worth having a close look at the small print.

Moneyfacts, a financial data firm, has discovered that not one of the best-buy ISAs of the past eight years has maintained its high interest payouts. Banks have tempted savers with high rates, only to downgrade them a short time later.

The result? We have been denied millions of pounds in interest which can cancel out the advantages of the tax breaks cash ISAs offer.

"Just because an ISA was a best-buy when you opened the account does not mean the interest rate is going to be retained," says Lisa Taylor of Moneyfacts.

So what should you do to make your money work for you? As always, the main message is to keep an eye on interest rates, on websites such as www.moneyfacts.co.uk and www.moneysupermarket.com.

"Savers should shop around," says Lisa. "At the height of the ISA season, all the banks and building societies will be offering marvellous deals. But watch out a couple of months later - check to see if they are passing on full base-rate increases."

And if they're not, don't let your money languish in a poorly paying ISA: switch it to an account paying a higher rate of interest. Do not, however, withdraw all the money in cash from your current ISA as you will lose your tax break.

Make sure the bank or building society you are switching to can set up a transfer for you. And remember, too, that if you decide to take some money out of your ISA, you won't be able to pay any more back if you have reached your limit of pound;3,000 in deposits.

Choose the right account and an ISA is still a sound investment. Since they were introduced by the Government in 1999, more than 16 million of us have invested pound;125 billion in the schemes, with the cash ISA being the most popular and the simplest to set up.

For those with more capital to play with, you can invest up to pound;7,000 in one maxi ISA that invests in stocks and shares.

Or you could take out two mini ISAs - pound;3,000 in a cash ISA and up to pound;4,000 in an equity ISA



Fixed rate Halifax ISA saver

GrossAER: 6 per cent, fixed for 4 years

Withdrawal penalty interest: 180 days

Deposit: pound;3,000

Dunfermline Building Society

Fixed rate ISA (issue 7)

GrossAER: 6 per cent, fixed until June 30, 2009

Withdrawal penalty interest: 180 days

Deposit: pound;3,000

Newcastle Building Society

Fixed rate ISA GrossAER: 6.1 per cent, fixed until October 20, 2008

Withdrawal penalty interest: 60 days

Deposit: pound;1

Available until March 23, 2007

Withdrawal penalty interest applies to amounts withdrawn during the fixed term

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