Another tax year is with us, which means a new ISA allowance is available of £10,200 – of which up to £5,100 can be held in a cash ISA, with the rest of the allowance held in an equity ISA.
But the market for ISAs – Individual Savings Accounts – is not a fair one, various consumer organisations believe. A common complaint from readers is that banks and building societies can take months to transfer ISAs from an existing account to a different provider that pays a higher rate of interest.
This experience is common, according to a complaint just submitted by Consumer Focus to the Office of Fair Trading. The problem is made worse because many financial institutions offer high rates of interest on ISAs to win custom – and then run the rates down to virtually nothing over a period of time. Some once competitive ISAs now pay as little as 0.1%.
According to research conducted by Consumer Focus – a government body promoting consumer rights – the average interest rate on a cash ISA is under 0.5%. This is despite Santander offering 3.2% (3.5% before the end of the financial year) on new cash ISAs and several other institutions offering over 3%. About 15 million people across the UK are trapped in local interest paying ISAs, believes Consumer Focus.
“At less than half of one percent interest the average ISA saver is getting a poor deal,” argues Consumer Focus chief executive Mike O’Connor. “Of course, people could vote with their feet and switch to the 3% deals currently on offer, but we are concerned that the cumbersome transfer process and poor information provided by the banks inhibits doing this.
“There is evidence that very few people do actually switch their accounts. It beggars belief that in 21st century Britain it takes a month to transfer information and funds from one bank to another.”
A Consumer Focus survey found that in a third of cases it took longer than five weeks to move ISA provider. Just one in 10 transfers took less than two weeks. And consumers often had little idea how much interest they were earning on their cash ISA.
The OFT has now been asked by Consumer Focus to tackle what it regards as problems of unfairness in the ISA market. The specific issues Consumer Focus has raised are the delays in making ISA transfers; the use of ‘bait pricing’ to attract customers, before rates are subsequently lowered; the difficulty for customers in knowing what interest rate they are being paid; and providers’ rules that can prevent customers moving to higher paying accounts.
The complaint is backed by Which? and other consumer bodies. Which?, in addition, is calling for a ten day limit on ISA transfers, with the banks operating a fully electronic transfer system. Customers should also be told, says Which?, whenever interest rates are reduced.
Kevin Mountford, head of banking at the comparison website moneysupermarket.com, said he supported the complaint. “Anyone who has ever tried to move their ISA pot to another provider will know exactly where Consumer Focus is coming from,” says Mountford. “What should, in theory, be a simple process can often lead to weeks of delays, phone calls and worry for customers.” Mountford suggests the system used by mobile phone operators – who issue a ‘PAC’ code to process a transfer – should be adopted by ISA providers.
But Moneysupermarket.com warns that forcing providers to maintain higher rates of interest on ISAs will merely have the effect of pushing down the best rates and penalise those consumers who are best at playing the game of chasing interest rates.
Consider fixed rates
It is likely that consumers will increasingly have to move to fixed rate cash ISAs if they are to obtain good rates of interest. These have the obvious downside that consumers must pay a penalty to make a withdrawal. The other problem, at present, is that rates are not much higher than the best instant access cash ISAs.
According to Moneyfacts, the best fixed rate ISAs at present is offered by the Coventry Building Society, offering 3.25%. While this is only marginally better than the headline rate offered by Santander (and its Alliance & Leicester subsidiary) on its cash ISA, the Santander 3.20% rate includes a bonus of 2.70% – so the rate falls to a meagre 0.50% after a year. The downside with the Coventry account is that savers must suffer a loss of 120 days’ interest to make a withdrawal.
An attractive alternative for those who are looking for a home to transfer an existing ISA might consider the Julian Lodge Bank, which is paying 4.40% on a five year fixed rate bond, or the Principality Building Society, which pays 4.35% on a five year bond.
Keeping abreast of which providers offer the best ISA rates, though, is not simple. Which is exactly the point of the consumer complaint.
Q. My holiday plans collapsed when our flight was cancelled by the Icelandic volcano dust. Can I recover my costs?
A. Airlines that cancel flights – even if it is not their fault – must offer passengers the choice of a full refund, or a transfer to another flight. In addition, where a passenger is stranded overnight, they must pay for accommodation, meals, refreshments and the cost of two phone calls. But airlines are not required to compensate for other consequent losses, such as paying for hotel rooms at your holiday destination that are not used, or the cost of extra trips to the airport. These costs may be covered by travel insurance, which it is always advisable to have for holidays and journeys involving flying. But the details of travel insurance cover vary according to policy. The Consumer Council for Northern Ireland provides a guide to air passengers’ rights, Plane Facts, which can be obtained free by phoning 0800 121 6022, or downloaded from the website www.consumercouncil.org.uk.