What I’d look for to find the REAL best cash Isa: SYLVIA MORRIS

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If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect account placement or editorial independence. 

New enticing-looking Isa deals are being launched every day as providers battle to lure savers who want to take advantage of their allowance.

Providers know that this is the time of the year when savers are dashing to put their money in a tax-free cash Isa ahead of the deadline on April 5. After that date, savers lose any portion of their allowance that they have not used.

Providers all want their share of your deposits. Last year, a massive £17.5billion went into cash Isas in March and April alone, so they know this is the most lucrative time of the year to go fishing for new customers.

If only picking the best cash Isa was simply a matter of checking which provider is offering the best interest rate.

Sadly, deals that look enticing on the surface can end up proving less lucrative than others with lower rates, because of the limitations and strings attached.

So, here is my ultimate guide to selecting the best deals – and the nasty pitfalls to watch out for.

Keep an eye on sneaky bonuses

Providers are offering ever larger bonuses to propel them into best-buy tables. But once the bonus period ends, the rate reverts to a pitiful one.

For example, Tesco has upped its rate on its Instant Access Cash Isa to 4.02 per cent – a decent rate from a well-known bank (now part of Barclays). But that includes a huge 2.97 percentage point bonus for a year – the underlying rate is a shabby 1.05 per cent.

Providers tell me that easy-access cash Isa money tends to be sticky and once we have put money in an Isa, we make fewer withdrawals than on ordinary accounts.

So, unless you remember to move your money when the bonus period ends, you may end up earning less overall than if you’d opted for a lower rate with no bonus in the first place.

Beware Isas that are not flexible 

Some Isas are flexible, which means you can take money out and replace it in the same tax year without affecting your £20,000 cash Isa allowance.

Accounts that don’t offer this can end up far less profitable.

Say, for example, you put £20,000 into a cash Isa that was not flexible. If you took out £10,000 temporarily, you would have to wait until the next tax year to put it back again – and keep it outside of your tax-free wrapper in the meantime.

However, if you had a flexible one, you could replace it without it counting towards your allowance.

Make sure you can split your cash 

Under HMRC rules you can split your annual allowance between as many providers as you like and hold a mixture of fixed-rate and easy access accounts.

But some providers only let you open one each year with them as their computer systems can’t add up the total you have put in spread over more than one account.

Check if the Isa you have your eye on allows this flexibility before you open it or you could be met by unexpected limitations later.

Splitting your annual allowance can be useful if, for example, you wish to keep some of your savings in an easy-access Isa where you can get to it when you need to and some in a fixed-term Isa that pays a higher rate but that you can’t touch until the term ends.

Watch out for app-only accounts

Some Isa providers only let you open accounts online or on your phone or tablet through their apps, while others are on offer in branches or through the post. 

If you are not happy managing your account through an app only, make sure your provider offers other options as well (see my best-buy tables for my top picks).

Withdrawal restrictions 

You would think that an easy-access Isa would be just that – you could get hold of your money whenever, and however, you choose. 

But increasingly this is not the case. Some limit the number of annual withdrawals before your interest rate is slashed or you are forced to move your money elsewhere.

These accounts frequently offer better rates than those that allow you unlimited access to your money, so may suit you if you don’t plan to access your cash, but want to be able to in an emergency. 

The best rates here are online, for example, the new Vida Savings Double Access Isa at 4.16 per cent. It lets you take money out twice a year. 

It trumps Aldermore’s Reward Single Access Account Isa (one withdrawal a year) which it pumped up (for new savers, not those already in the account) from 4 per cent to 4.11 per cent. Both accounts are flexible.

Move your old cash Isas

Don’t undermine your efforts with this year’s cash Isa allowance by letting old tax-free saving pots languish on low rates.

Banks have a nasty habit of letting rates on legacy accounts drift lower while they bump up returns on new deals. If an old cash Isa slides on to a 2 per cent rate, you will lose half the interest you could have earned by moving to one of the current 4 per cent deals.

Not all cash Isas accept transfers, but many do. You can also pay new money into one cash Isa and transfer old pots to a different account.

If you are going to move your money, make sure you use the official Isa transfer system to keep the tax free wrapper intact.

Which deals should you pick? 

The top rate currently on offer on an easy-access account is 4.7 per cent. You can get this from app-based provider Prosper* but to open an account you need £10,000 minimum and the rate is boosted by a 12-month bonus – so make a diary note to switch this time next year. It’s the top rate paid on a flexible easy-access Isa.

Investing platform Trading 212* using this link also offers a flexible cash Isa paying 4.68 per cent. This includes a 1.08 per cent 12 month bonus and transfers from previous years get the underlying 3.6 per cent rate

Meanwhile at the savings platform arm of Hargreaves Lansdown* the top rate is 4.3 per cent. Hargreaves Lansdown’s cash Isa, though not flexible, lets you open an account with a minimum of £1 and you can hold fixed-rates and easy access Isas all in one place. 

Neither are banks but they essentially operate as middlemen – Prosper funnels your money into Griffin Bank, while Hargreaves Lansdown holds it through Shawbrook. 

Your money is covered by the Financial Services Compensation Scheme.

Atom Bank pays 4.25 per cent on its app-based account with no bonus or withdrawal restrictions, but it is not flexible.

If you would rather open an account in a branch or by post, go for Family, Harpenden or Skipton building societies, where you can earn between 3.92 per cent and 4.03 per cent. The Skipton account pays 3.92 per cent and is flexible.

If you don’t need flexibility, go for Family BS for the higher rate. You will never end up with a raw deal with this account, because it always pays the average of the top 20 Isa rates. You only need £1 to open it.

If you are happy to tie your money up, a fixed-rate Isa may prove better value. That’s because easy access-rates will fall if the Bank of England cuts its base rate from its current 3.75 per cent. 

With a one or two-year fixed account, you can currently bag a rate a tad over 4 per cent – and you’ll secure that for the duration of the term.

Make sure you are happy tying your money up. If you later decide you need the funds, you can close the account early. But you will pay dearly for it.

Generally, on a one-year fixed rate Isa you will lose 90 days’ interest – which effectively knocks a quarter off the interest you hoped for. For each £1,000 at 4 per cent, it will cost you just under £10.

On the full £20,000 allowance, that’s £200. It’s usually double – at 180 days – on a two-year deal. While on a longer five-year term it can cost you the equivalent of 15 months’ interest, a thumping £1,000 on a £20,000 balance.

There are plenty more providers that pay around 4 per cent – you can find a full list our best cash Isa rates tables, where you can also keep up to date with new-account launches as we approach the Isa deadline.