ISAs: Should you stay with your bank?

When it comes to your finances it’s often the case that loyalty doesn’t pay. But looking at this year’s cash ISA offerings, it seems that staying with your bank CAN reap rewards.

New ISA deals are finally coming onto the market in the run up to the end of the tax year. But, according to our research at MoneySuperMarket, average interest rates (AERs) have dropped by 22% in the last 12 months alone - with average returns now standing as low as 1.79%. However, while providers aren't pulling out the stops to attract new customers, many are concentrating on retaining the ones they already have. This begs the question, should you stay with your own bank? We investigate…

Top rates for existing customers

If you’re wondering which cash ISA to invest this year’s (2013/14) £5,760 allowance in, it’s always a good idea to see what your own bank can offer you first. Some banks reserve preferable ISA rates for their existing customers, so in many cases you may be better off staying put rather than investing with a different provider.

For example, Santander has just introduced a 2 Year Fixed Rate ISA paying an annual equivalent rate (AER) of 2.00% tax-free which is available to everyone – although you must be aged at least 16 to open a cash ISA.

This rate is pretty competitive, but if you are a new or existing Santander 123 Current Account, Cashback Credit Card or Select customer, it increases to a 2.30% tax-free, which is a market-leading deal over the timeframe. This account can be opened with a minimum investment of £500 and accepts transfers from existing ISAs.

Nationwide Building Society has also reserved its top ISA rates for existing customers. In terms of variable ratem easy access accounts, its Flexclusive ISA (Issue 7) pays 1.75% tax-free, provided you have a Flex account with the building society. It can be opened with as little as £1.

If you don’t have a Flex account, then the top rate of interest you can earn from a Nationwide cash ISA is 1.60% tax-free from the Easy Saver ISA (Issue 5) which also provides instant access. Neither of these accounts allows transfers from existing ISAs, but, if you are looking to move money across from another provider, the building society offers an Instant ISA Saver account to everyone which pays 1.50% and  accept transfers.

HSBC is another savings provider which has introduced new higher rate cash ISAs for its existing customers. For example, if you have a Premier account with the bank, you will be eligible for the HSBC Loyalty ISA Premier which pays 1.60% tax-free, provided you top up the account at least once each year.

Anyone with an Advance account will qualify for the Loyalty ISA Advance Account paying 1.50%, while if you have an HSBC current account, you can open the Loyalty ISA Current Account which pays 1.40% tax-free. You can make withdrawals from the Loyalty Cash ISA whenever you want without penalty.

How loyalty rates stack up against the competition

The Santander 2 Year Fixed Rate ISA paying 2.30% for existing customers is the top two-year fixed rate cash ISA currently available, so if you have a Santander account already and are happy to tie your cash up for a while, it makes sense to stick with the bank.

If you don’t have a Santander account however, you can get a close 2.25% with Halifax’s new ISA Saver Fixed 3 Year account but you will have to tie up your money for three years. This deal can be opened with a minimum investment of £500. You cannot make withdrawals during the 3-year term, and if you close the account early, you will lose 270 days’ interest.

On a like-for-like two-year fixed rate deal however, you will get a rate of just 2.05% tax-free from both Nationwide and Halifax – both of which are open to all customers and accept transfers in.

The market-leading 1-year fixed rate cash ISA is currently Leeds Building Society’s 1 Year Fixed Rate ISA (Issue 57) which pays 1.90% tax-free and can be opened with £1 and you don’t have to be an existing customer. However, this account does not accept transfers from existing ISAs. A maximum of 25% of the balance can be withdrawn without notice or penalty, but if you want to take out more than this, you will lose 90 days’ interest.

If you can tie up your money for six months longer, look at Halifax’s 18-month fixed rate ISA which is top of the tables for that duration paying 2.00% tax-free. This account, again, is open to new customers – and also accepts transfers in from other providers. You can read more about the deal – and the Halifax Savers Prize Draw, which is another perk, with Jessica Bown’s Focus On.

If you are an HSBC customer, while its Loyalty Rates are respectable, they are less competitive than others so it may be worth considering alternative accounts from other providers.

For example, the top rate available from the bank’s Loyalty ISA is 1.60%, an account which provides access to your funds at any time. But Britannia Building Society (available through the Co-op brand) pays a higher 1.75% on its Select Access Cash ISA (so long as you only make two withdrawals a year). Santander has just upped the rate on its DIRECT ISA SAVER to pay a variable 1.60% (though the rate drops to a variable 1.50% (also tax-free) after 12 months. Both ISA accounts, which pay better returns than HSBC's loyalty rate, can be opened with £500, are available to all customers and accept transfers in. 

One way to earn a better rate but not forfeit access to your cash entirely, is a notice cash ISA. The Islamic Bank of Britain has a deal paying 1.80% which can be opened with as little as £250 and is open to all customers and accepts transfers in. It does, however, require 120 days’ notice if you want access to your funds.

A final word…

Always do plenty of research before investing this year’s cash ISA allowance, and check with your bank or building society whether they can offer you a preferential rate as an existing customer. Whichever account you go for, remember to monitor your returns regularly, and switch if you find more competitive rates of interest available elsewhere.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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