ISA newcomers alerted to token deposit trap

The finer points of fixed-rate ISAs, often buried in the small print, could sting new investors joining the stampede towards such tax-free savings if their opening deposit is less than the full annual allowance.

Among a cross-section of the highest paying individual savings accounts (at the time of writing), only a handful allow new customers to pay money in once and then let them add funds later in the year.

Using many other ISAs, excluding those with Lloyds TSB, Leeds BS and Marks & Spencer, a saver limping in with a token deposit loses what remains of their cash ISA allowance for this tax year (£5,340).

Despite, then, an opening saving of £1,000 implying a further £4,340 could be deposited, many customers may be disappointed because the introductory rate they signed up to may have expired or been recalled.

These savers may eventually be able to switch their ISA to another provider, yet Revenue & Customs rules state that individuals can hold only one cash ISA (and one stocks and shares ISA) in any single tax year.

There are no limits on the number of different ISAs an individual can hold over time though, but most providers block access to the money in the fixed-rate ISA during the term, preventing savers from being able to switch and top up.

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