Confusion over cash ISA interest rates

Following a cash ISA super-complaint lodged by Consumer Focus, research by money.co.uk has revealed the full extent of consumer confusion surrounding cash ISAs, revealing that as much as 83% of cash ISAs from 2009 or earlier could be earning interest of 0.1% or less.

The research, which has prompted money.co.uk to develop a dedicated cash ISA information resource online, reveals that consumers are largely failing to effectively manage cash ISAs to make sure they consistently pay good rates of interest:

Only a fifth of consumers who have ever held an ISA keep a careful eye on cash ISAs taken out in 2009 or earlier to make sure they continue to pay good rates of interest

Only 17% have transferred funds into new ISAs to get better rates of interest.

Tellingly, only a small minority of cash ISA customers feel their providers have been effective at keeping them informed of changes to interest rates, to help them manage and maximise their money effectively:

Only 15% think their providers have been effective at keeping them informed as to changes in cash ISA interest rates

Only 8% feel their provider has been effective at keeping them informed about new ISAs paying better rates of interest

Finally, the research suggests that the consumers investing in cash ISAs in 2010 remain focused on headline interest rates and are paying too little attention to potential transfer limitations and associated fees:

54% have invested or plan to invest in a cash ISA this year, with almost three quarters (72%) of those focused on finding the best interest rates available at the time

Less than half (47%) of those investors will focus on products that allow funds to be transferred at a later date, while just over half (53%) will make sure there are no ‘hidden charges' associated with the product

Chris Morling, MD of money.co.uk, said: "This confusion and perceived lack of information is a real problem as many of the cash ISAs that advertise 'headline grabbing' returns rely on introductory bonuses to temporarily inflate their rate. Once these come to an end, savers can find themselves unwittingly earning as little as 0.05%.

"The average return on cash ISAs now stands at 0.41% because so many have funds languishing in accounts paying so little in the way of interest. As Consumer Focus rightly pointed out, the current system just isn't working.

"Clearly the majority of cash ISA customers need more help and advice if they are to make the most of the tax free savings opportunity that cash ISAs provide - help they do not feel they are getting from providers."

To help address the issue, and provide cash ISA holders with more information on rates and transfer rules, money.co.uk has established a dedicated cash ISA information resource online.  It includes:

Clear guides to switching funds from an existing ISA to a new product paying better rates of interest

General information offering clarity on cash ISA product options

A dedicated product comparison resource, detailing only cash ISAs that allow outward transfers at no cost, and which can be used to assess 2010 cash ISA options according to a wide range of features rather than just the headline interest rate.

For more information, visit money.co.uk.