Since October last year the Bank of England has slashed interest rates from 5% to just 1%. The central bank's figures show that the average rate on a cash ISA at the end of January was 1.38%, down from 5.06% in the same month last year.
It is feared that a total of £9.5 billion could be withdrawn from cash ISAs - which would result in a total loss of £196 million in tax-free interest. Remember though low rates will not last forever. It's easy to see why savers are turning their backs on these once much-loved savings accounts, but people shouldn't act in haste. Having said that, what are your options ?
Keeping it in cash
Once you withdraw your money from an ISA you can't put it back in, unless you haven't used all your ISA allowance for the current tax year. If you plan on depositing your cash ISA into an ordinary savings account, any interest you earn will be subject to tax.
So, while a balance of £10,000 in a cash ISA paying 2.05% would make just £205 a year, a basic-rate taxpayer would need to find a savings account paying more than 2.57% to make more in interest, while higher-rate taxpayers would need an account paying more than 3.42%. Moving cash from your ISA into an ordinary savings account doesn't make a lot of sense - especially as rates on fixed and instant access deals have taken as much of a battering as cash ISAs have.
Finding a new cash ISA that pays a better rate is another option. You could find a new ISA that accepts transfers and move your ISA savings from previous tax years. If you want to transfer your balance, start by contacting the new provider and applying for a transfer. You will be asked to fill out a cash ISA transfer form so your balance is treated as a transfer and not as an account closure. How long it takes varies, and it will take longer towards the end of the tax year.
Moving your savings into a stocks and shares ISAs
You can invest up to an additional £7,200 in a stocks and shares ISA each tax year, minus any amount you have invested in a cash ISA. New rules introduced in April 2008 mean you can now transfer your cash ISA into a stocks and shares ISA, but transfers are only one-way so once your money is in a stocks and shares ISA you cannot switch it back into a cash ISA.
If you are prepared to take a greater risk, and can afford to do so, this could be a worthwhile route as savings rates head towards 0% this year. It is possible to invest on lower volatility sectors such as corporate bonds and gilts in this way which should provide higher returns in the medium term, albeit at a higher level of risk.
You do need to be comfortable with the risk involved as your capital is not guaranteed.
If you are happy with the risks and timescale involved with investing, contact your adviser and fill in the application form. Your adviser should keep a close eye on your investments, and review your portfolio at least once a year.
More Information on Investment and Savings from IFA's