ISA holders look ready to jump

The gap between the best and worst-paying individual savings accounts (ISAs) has broken the three percentage mark and will widen further with the release of higher yield deals.

In the coming weeks, variable and one-year fixed-rate ISAs will come onto the market, promising returns of up to about 3.5 per cent – marginally more than the current best buys.

The influx of higher-interest deals from banks and building societies will put dozens of other ISAs to shame, as, without being sweetened, they will offer just 0.05 or 0.1 per cent.

These lower-yield ISAs – offering, in the worst case, interest a year of just £1.80 on a balance of £3,600, are the result of the historically low base rate set by the Bank of England.

Since the spring, the bank has fixed interest rates at 0.05 per cent – a rate which it held on Thursday for the 11th consecutive month, much to the disappointment of all savers.

Providers releasing the higher interest ISAs will no doubt target savers who are yet to use up their tax free allowances for this year, and for the tax year starting on April 6, 2010.

But those savers with an existing ISA may also be sough out, as they should be able to switch their balances to the new provider, assuming the interest on offer is the saver's main motivation.

Being prepared to move to a better deal is nothing new for ISA holders – some accounts pay a high rate for the 12 months but appear less attractive once the introductory bonus expires.

Financial advisors say that if ISA holders do wish to switch accounts, they must make sure they transfer their balance rather than withdrawing it, otherwise they could lose the money's tax-free status.

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