You’ve three weeks to make the most of tax free savings

Good fixed and variable rates can still be found, reports Chiara Cavaglieri

For a long time now, there has been little to get excited about over cash savings even when they are given the added sweetener of being protected from tax in an Individual Savings Accounts. But with ISA deadline day just three weeks away and banks still keen to boost their deposits, there is renewed competition for your cash.

"The variable rate deal from Santander is the really outstanding offer this year apart from the fact it won't allow transfers in," says Andrew Hagger from Moneynet.co.uk.

The appeal with Santander's Flexi ISA account, launched recently, is that it is guaranteed to pay 3 per cent above the Bank of England base rate for the next 12 months. This means the pay rate currrently stands at 3.5 per cent. This beats the one-year fixed rate ISA from Cheshire building society, which pays 3.00 per cent on deposits of at least £1,000 and doesn't allow any withdrawals. In contrast, the Santander account offers unlimited penalty-free access on deposits from just £1, albeit on new ISA cash only, so no transfers are allowed. What happens after the 12 months are up is a different story, however, so you'll need to monitor the rate and be ready to move your money again.

If you have any old ISA accounts they will probably be lagging behind so it's vital to look around for a better deal. Money can be transferred from an old to a new ISA without losing its tax-free status. There are, however, several transfer rules to adhere to.

First, you can only transfer a cash ISA into a shares ISA, not the other way around. Second, for the current year's allowance, you can move all of it to another provider (or a shares ISA) but it must be moved as a whole. In contrast, previous year's ISAs can be split between more than one provider, as long as they accept transfers.

Fixed or variable?

Should an ISA investor fix or opt for a variable rate account? According to analysts Defaqto, the average rate available across all cash ISAs, on an investment of £3,600, is 2.3 per cent. Of the fixed accounts, the average is 3.4 per cent and for variable accounts that drops to just 1.61 per cent.

David Black of Defaqto says variable rates range from 3.5 per cent to 0.1 per cent: "If you've had an ISA for some time and it's no longer competitive, transfer it somewhere else."

The longer-term, fixed-rate ISAs are paying the best rates with Yorkshire Bank offering savers with a minimum investment of at least £2,000 the top rate of 5 per cent on its five-year fix.

"I would be reluctant to commit to a fix in excess of three years in the current climate as interest rates may well start to rise in the next 12-18 months and a four- or five-year deal taken out now may end up looking like a poor deal further down the line," says Mr Hagger.

The Nationwide BS's three-year fixed rate, paying 4.4 per cent on investments of just £1, stands out and beats the best four-year fix on the market from Halifax, which pays 4.25 per cent on deposits of £500.

Quirky options

Look for the quirkier deals, such as Nationwide's Champion ISA, which pays the average of the top-paying branch-based ISAs plus a 1.35 per cent introductory bonus to give a current rate of 2.5 per cent. Another option is First Direct's e-ISA, which pays 2.75 per cent fixed until 31 August 2011. This account allows you to withdraw your cash should you need to, making it a fantastic option for savers who want emergency access to their money as well as the comfort of a fixed rate.

The five-year, fixed-rate account from Leeds BS also offers something a bit different by allowing you to withdraw up to 25 per cent of your original investment without penalty.

Last chance

Consistency should be yet another consideration, particularly if the idea of having to compare and switch regularly doesn't appeal to you. Earl Shilton BS, for example, has topped Moneyfact's table of the most consistent accounts over the past 36 months, with its 90-day cash ISA. This has paid a total of £430.83 in interest earned on £3,000 in 36 months to 1 January 2010. Other contenders include Monmouthshire BS, Standard Life Cash Savings and Yorkshire BS.

Your last chance to use up your ISA allowances is 5 April. If you don't invest it before the deadline, it cannot be carried into next year. Under-50s can currently invest £3,600 of their total £7,200 allowance in cash, while the over-50s can invest half of their increased £10,200 limit.

Saga is currently paying up to 3.90 per cent for over-50s with a minimum investment of £1 on its three-year fix and 3.50 per cent with its two-year fix, again on deposits of just £1.

"The key things to watch out for are whether the rate is guaranteed for the duration of the product – sometimes the rate falls away after six months," says Ali Crossley of Saga personal finance.

"Also, check that you can transfer in. In the case of over-50s who have probably built up considerable savings this is important."