Unhappy with your ISA manager’s performance? Victoria Hartley shows you how to improve matters

Over the past year and a half, savers have anxiously watched as interest rates have fallen away and stock markets have plummeted to new lows. The Building Societies Association (BSA), whose members hold 37 per cent of all cash ISA balances, has even called for the MPC to stop cutting rates because of the damage it is doing to savers.

Adrian Coles, director general of the BSA, says ‘The reductions, from 5.75 per cent, prior to the run on Northern Rock in 2007, to one per cent have seen incomes from savings drop by over 75 per cent, although the full impact of the base rate cuts has not actually been passed on to many savers.’

Pensioners, in particular, are suffering and face a sharp drop in their incomes and living standards, says Coles. And as the returns fall, another worrying trend is the widespread withdrawal and redistribution of funds from investment and savings accounts.

Building societies report withdrawals of £212 million from ISAs under their care in January this year, in stark contrast to the £46 million saved in December.

Make your ISA work harder
As good returns become harder to find, it is more important than ever to get the best returns possible for your invested cash. ISAs remain the most tax-efficient way to save regularly, and this message seems to have got through to most UK taxpayers. The most recent HMRC figures suggest that last year we were holding 14.7 million ISA accounts.

The advantages of ISAs are clear, as savers and investors pay no tax on any income they receive from their money, including dividends, interest or bonuses and capital gains tax.

But what can you do if you are unhappy with the returns you are getting on your ISA? The answer is to move it to another ISA manager and, provided this is done properly, you won’t lose the tax benefits.

How to make the switch
First of all, check the service record of the provider you want to move funds to and the consistency of its interest rates (if it is a cash ISA) or performance record. If it is a cash deposit, is the provider likely to pull you in then drop your rate after six months?

Also, read the small print to find out whether your current provider is going to charge you a fee to move to another provider, and don’t forget to check this with your new provider.

Nathan Wallis, spokesman at Birmingham Midshires, says when it comes to choosing the right ISA, it is important to pick a product that suits your needs: ‘There isn’t that much small print to go through on ISA accounts, because all providers have to offer a summary box showing product details. But if you might need to withdraw funds, you could be better off with an account paying a lower rate, for example, and forfeiting the interest.’

With an investment stocks and shares ISA, before you move managers your existing provider can insist that you move any assets held inside their ISA wrapper, so think about whether this suits your goals before signing up. Also, once you cash in stocks and shares ISA assets, the funds cannot be placed in a cash ISA account.

This tax-free allocation simply disappears, although investors can transfer ISA cash allocations into a stocks and shares ISA as long as the value of the assets does not exceed £7,200 that tax year.

However, you can move as much as you want at any time from previous tax years. Following the rules ISAs also have to be transferred directly from one ISA manager to another – don’t close an ISA account and open another one because the tax-free status of the previously invested cash will be lost this way.

However, some providers will insist you transfer all your assets, even if you only wish to transfer a portion, which is another reason to always read the terms and conditions before signing up, especially if you are an active investor and likely to change providers for better performance.

You should also stay in touch with both new and old providers to make sure your funds are being processed quickly. Tanya Jackson, spokesperson for Yorkshire Building Society, says, ‘Make sure you send the application yourself, as well as spurring the ISA manager into action and keeping an eye on a set time frame. Don’t let things slip.’

And if you are disappointed by your service, always complain immediately, especially if you are unlikely to get backdated interest or forgo investment returns.

On the move
Few problems have been reported from investors switching investment ISA accounts, in contrast with the problems some cash ISA savers have experienced. Last year, fears of cash losses and plummeting stock markets threw this traditionally relatively sedate market into turmoil.

Over the summer, thousands of investors rushed to transfer their money from equity funds into safer havens like gold ETFs and fixed-interest investments, or put new ISA money into safer-looking cash ISA accounts.

In July, the UK’s largest building society, Nationwide, swiftly became overwhelmed by applications for its fixed-rate cash ISA offering a best-buy 6.15 per cent.To date, the mutual still won’t accept transfers into its cash ISAs until it has overhauled its transfer procedures.

Nationwide isn’t the only provider to disappoint potential customers in this way. Transfer times of up to 90 days, poor information exchange procedures and overwhelmed and under-trained call centre staff leading to an avalanche of complaints have, unfortunately, proved characteristic of some parts of the ISA sector in recent months.

HMRC expects providers to move customer funds within 30 days of the request, but there remains little commercial incentive for providers to move funds swiftly to rival providers. However, it should be pointed out that some ISA managers, including the Nationwide, backdate interest payments to the date the fund cheque is issued, so, even if processing takes a while, the saver isn’t missing out.

ISA providers brought out five ‘transfer guidelines’ in an attempt to tackle the issue last year, and TISA (the Tax Incentivised Savings Association) says there has been a 30 per cent improvement in service since then. Six unnamed high street banks are piloting electronic transfers, but it is clear that some providers are making more effort than others.

Future prospects
Cash is still king for ISA savers, and more than double the number of savers hold their money in cash than in investment ISAs. Halifax is currently top of the Moneyfacts fixed-rate cash best buy table with its Fixed Rate ISA Saver offering four per cent over four years for savers depositing over £500. The ex-building society also has a three-year version offering 3.7 per cent but warns that the rate reduces for subsequent deposits.

Nationwide is offering a three-year fixed-rate ISA bond at 3.5 per cent on a minimum deposit of £1 and Birmingham Midshires is offering 3.5 per cent on a £500 initial deposit. Moneyfacts also publishes a cash ISA table each year that shows the most consistent providers in the market, which will suit savers who don’t want the hassle of switching to chase down rates.

Michelle Slade, analyst at Moneyfacts.co.uk, observes that ‘With so many changes to rates going on in the market, it is difficult to know where to move your money to, as an account that tops best buys one minute may see its rate greatly reduced the next.’

The leaders are largely building societies with, for example, four Principality Building Society products in the tables, including its most popular, the e-SAVER account.

Emma Stanford, spokesperson for the Principality Building Society, says ‘e-SAVER can be opened with as little as £1 and deposits can be made as frequently as a customer requires, up to a total investment of £1 million. The rate has remained consistently competitive, reflecting the low operational costs associated with this account type.’

Over 18 months, Egg emerged first and was the only non-mutual provider among other building societies Tipton and Coseley, Kent Reliance, Earl Shilton and the Yorkshire.

Focus on consistency
Slade adds that ‘The Moneyfacts consistency tables show the accounts that continue to pay a good rate of return.They may not be best buy rates, but had you left your money with them for 18 or 36 months, you would have achieved the best rate of return.’

Yorkshire Building Society is another provider with a strong track record for consistency. Its Monthly Reward ISA, launched at the beginning of February offers a rate of 2.96/3.00 per cent AER and is instant access. The account pays interest monthly and customers get £50 cash back on deposits of £9,000 plus opened before 14 March.

But another trend to watch out for is that more and more cash ISA providers are offering introductory bonuses. The best introductory bonus ISA accounts include Alliance & Leicester’s Easy ISA offering 1.5 per cent until 28 February 2010 and Scottish Widows ECash ISA with 1.5 per cent over 12 months from first deposit.

An introductory bonus of two per cent provides £500 if held in a cash ISA, according to David Black, Defaqto’s principal banking consultant, which is £400 worth to a basic rate tax payer and £300 to a higher rate tax payer, all on top of the pay rate.

ISA savers are, however, taking greater risks than ever to get better returns, according to Ben Lundie of IFA Hargreaves Lansdown. The financial adviser has seen a tenfold increase in transfer requests, although he emphasises that the investment option is not for everyone because of the risk to the original capital.

‘Cash ISAs are being transferred to stocks and shares ISAs as investors see corporate bonds and equity income funds as a natural home.We can see this trend continuing for some time as rates head towards zero per cent,’he concludes.