Cash ISA changes for the over-50s

With rule changes about to commence for older savers, here's the lowdown on whether you'll be able to top-up your Cash ISA, and six of the best rates on offer.

Fancy some good news? Well, in about two week's time (6 October 2009) the annual ISA limit for anyone aged 50 or over by 5 April 2010 will rise by £3,000 to £10,200 per financial year. And the annual limit for the Cash ISA will increase by £1,500 to £5,100.

What does this mean?

In the decade since ISAs were launched they've become an important part of the way we save. They're certainly popular - according to the Treasury, 19 million of us have them.

Cash ISAs are a particularly attractive savings tool as tax isn't payable on the interest earned (which in turn has made them a popular alternative to pensions). So in general, the more we can stash in them, the better (particularly as they do not need to be declared on a tax return).

And while the limit has remained relatively static (rising just once in 2008) if you'd stashed away the full amount since their launch in 1999 you'd now have a pretty tidy sum squirreled away.

What about the rest of us?

Of course, this new ISA increase is great news for the over-50s but what about everyone else? Well, don't start stamping your feet - the same change will come about for the rest of us on 6 April 2010.

Can I top up my Cash ISA?

Now if you're over 50 (or are 49, but set to turn 50 by 5 April 2010) and you have already filled your 2009/10 Cash ISA, you're probably wondering how you can take advantage of the new rules? Do you need to open a new ISA or can you top up your existing ISA?

Unfortunately, you can't open two Cash ISAs in the same tax year. So you can't split your 2009/2010 ISA money into two accounts.

However, you can transfer your existing ISA - that you opened this tax year - to a new ISA with a different provider if you want to.

Obviously, this involves quite a lot of hassle and filling in forms, so you may prefer to just top up your existing ISA.

Unfortunately, your existing provider may decide not to allow you to do so. Our friends at Moneyfacts reckon that around two thirds of the Cash ISA providers they monitor intend to allow top-ups. But it does depend on the type of ISA you have.

Fixed rate accounts

For instance, since the credit crunch many of us have decided to chase the better rates and tie up our money in less flexible fixed-rate Cash ISA accounts.

The benefits are that your savings are protected from falls in the base rate. But on the downside you need to make sure the money is untouched for the term stipulated.

But fixed-rate accounts are offered for a limited period - once they close account holders cannot pay any more money in. So if you have a fixed-rate account, you could well find that the ISA changes are meaningless as it is impossible top up your account.

Which providers will allow top-ups?

So which providers will allow top ups? Well, unfortunately many providers are keeping the cards close to their chests and waiting until nearer the time to reveal their plans.

But I do have good news for Halifax/Bank of Scotland group (HBOS) ISA holders as they will be facilitating top-ups (you'll need to go into the branch).

I also gave Clydesdale and Yorkshire Banks a ring who revealed that they will also be allowing their variable rate account holders to top up (letters will be posted out to eligible account holders in a week's time). And Barclays, HSBC, First Direct, Lloyds and NatWest have previously indicated that they too will allow top ups.

What should I do?

If you're over-50, have used your Cash ISA allowance and would like to top it up come October, the first thing to do is give your provider a call (or go into the branch). They should be able to tell you whether or not you'll be able to.

ISA Transfers

If your existing provider doesn't allow top-ups, you can transfer your ISA to another provider. However, think this through carefully.

Fixed rate account customers who can't top-up may well be tempted to transfer, particularly as rates have risen considerably since the start of the tax year. But do so before the term is up and you will be likely to lose much of the interest earned.

It's therefore worth doing some sums to see if the amount of interest you'd lose is more or less than what you could gain by transferring to a better account. You should also check that you won't incur a penalty from either bank for transferring before the end of the tax year.

If it turns out it's not worth it for you to top up your Cash ISA, you may also want to consider putting your extra allowance into a stocks & shares ISA, instead.

Top ISAs to transfer to:

If you do decide to transfer your Cash ISA, and don't mind tying it up for a while, the Nationwide BS 5-year fixed rate ISA bond is paying a healthy 4.5% AER on savings of £1 or more.

But if, like me, you reckon that's far too long a term, Manchester BS is paying 3.01% AER (including a 12-month, 0.75% bonus) on savings of £1k+ in its Premier ISA 35 (Issue 5) which requires just 35 days' notice.

New Fixed rate ISAs

If you've yet to use your ISA allowance, Principality BS has a 3 year Direct Fixed Rate Cash ISA paying 4.2% AER on deposits of £1 or more, but this would tie your money up for 3 years.

Alternatively, Bradford & Bingley has a two year fixed rate e-ISA paying 3.75%AER on deposits of £1k+.

New Instant Access ISAs

But what if you'd prefer a simple, instant-access account? Then First Direct's e-ISA pays 3%AER on savings of £1+ for a year (after 9 Nov 2010 this reverts to 0.2%AER).

But for a no-nonsense rate you can't beat Standard Life's Cash ISA, which pays a straightforward 2.65%AER on savings of £1+ with no annoying bonuses, penalties or tie-ins.

While this ISA limit increase is a good move, it's turning out to be pretty complicated and will no doubt produce a lot of unhappy savers.

We'll find out more about what individual providers intend to do in the next week or so, but my general feeling is that most will find a way to facilitate top ups (even if it means allowing customers to open additional "ISA top-up" accounts).

So if you'd like to maximise your existing Cash ISA, get down to your branch or call your bank's head office and find out what it plans to do.

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