Cash ISA's - Things to consider...and why it's important to read the small print!

The examples provided within this article are accurate as of the 13th Febuary 2012.  Please check the small print of your chosen ISA at time of deposit for specific terms.  Please note that the examples provided are not unique with the providers mentioned and are only provided as an indication of how your Cash ISA can be impacted by the small print discussed.

Cash ISA's are one of the most tax efficient methods of holding your deposit based funds.  However, if you are confused about the number of different rates out there, you're not alone.  There are a number of comparison tools available online to compare Cash ISA rates (Moneyfacts, This is Money, and Which amongst them).  However whilst looking at the headline rate, it's important the you understand the underlying terms before you put your hard earned cash into one of these and I've detailed the main points you should consider below...

Fixed Term ISA's


Many of the attractive rates you may see in relation to Cash ISA's are Fixed Term arrangements.  The benefit of these type of arrangements is that you know how much you will receive in interest over the specified period.

Therefore these rates may suit you if you are sure you won't need the money for the Term the ISA is fixed.  However it's important to consider if you may need the money before the fixed rate period.  If requiring access is even a remote possibility it's time to read the small print!

Although the rate might be attractive, how is the rate impacted if you need access?  Does the interest rate reduce? or are they penalties of no interest for a fixed period of time, and how does that impact the rate?

Consider, as an example, the Halifax 5 Year fixed rate ISA.  Looking at the small print, it states that if early withdrawal occurs, the loss of interest is 365 days.  Therefore you lose a years worth of interest if you need the money within that 5 year period.  As you can imagine that can have a huge impact in the amount of interest you actually receive and therefore it's important that you understand this before entering into this type of arrangement.


Bonus rates and Bonus periods


Whilst comparison websites are an incredibly useful way to compare "headline" rates, Cash ISA providers understand that there are many of us who will look at these rates to compare the best providers.  However these "headline" rates can include two aspects, a standard rate and a bonus.

This Bonus is usually for a specified period of time and then the rate reduces to the standard rate.  Therefore although the rate you receive initially may look incredibly attractive....it may change at a stage in the future and reduce to a rate which is far less attractive.  Whilst ISA providers are all fighting to attract your funds, they are also reliant on one key factor, complacency.


In our busy lives it's easy to miss when your ISA rate is due to change, however if your Cash ISA has a bonus introductory rate ensure that you put that date when this finishes in your diary so that you know when it's time to shop around again.

Currently the Nationwide ISA provides a "headline" rate of 3.10%.  However this rate only applies until January 2013, and after this time reduces to a variable rate (currently 1%).  Therefore you can see that due to the reduction the importance of ensuring that when a bonus period expires, it's time to shop around.

Minimum Amounts


Let's assume you deposit some money, say £1000, into your Cash ISA.  You then need access to some of your money and you take £100 out.  So, you'd be safe to assume that the interest rate you receive would be the same as when you had the £1000 in the account, Right? Wrong!


Currently Cheshire Building Society pay 3.06% on their Web Based Direct Cash ISA (Series 1) on any balance greater that £1000.  However if your balance reduces to £999, the interest rate drops to 0.25%.

Whilst Cheshire building society isn't alone in having this sort of arrangement, the important point is regardless of who your Cash ISA is with, ensure that before making a withdrawal you understand the impact on your interest rate.

Financial Strength and Compensation

Many more consumers in today's economy are looking to understand how they are protected in the event of their ISA provider failing.  However with many ISA's provided by it's important to understand who provides the underlying deposit.

The AA, for example provide an ISA.  However if you look at the small print the current 'Deposit Taker' is Birmingham Midshires (which is currently a division of the Bank of Scotland).

The important point to consider is how your money is protected in this situation.  Whilst this constitutes a blog entry all on it's own, you can find full details of the Financial Services Compensation Scheme (including the standpoint of how subsidiaries are impacted) here :-

http://www.fscs.org.uk/what-we-cover/products/banks-building-societies/

To conclude.....




I hope you have found this article useful, and whilst it's not designed to be a conclusive list of areas to consider,  if there is one major point to all of the points shown here is that reading the "small print" and understanding these factors are important when selecting the right Cash ISA product and provider.