The top 10 cash ISAs for 2010

Choosing to invest in a cash ISA could be one of the best decisions you make this year. We check out 10 of the best...

How much did you manage to save in 2009? If the answer was 'not much', you might be pleased to hear that many of us are more optimistic about our saving ability in 2010. Indeed, according to research from NS&I, over a quarter of us believe we are more likely to save money in the next 12 months than we did last year.

That's pretty encouraging stuff!

But if you are planning to save more, where should you begin?

Personally, I think a great starting point is a cash ISA - and that's simply because a cash ISA is tax-free. So you don't need to worry about the nasty taxman getting his grubby hands on any of your money. Makes a nice change, doesn't it?

You can stash up to £3,600 in a cash ISA each financial year - unless you're aged 50 or over by 5 April 2010, in which case the annual limit is even higher at £5,100.

If you've already got a cash ISA, and you want to transfer your funds to one paying a better rate of interest, make sure you check to see whether this is possible. Unfortunately, some cash ISAs won't allow you to transfer funds in from an existing cash ISA, so you need to check before you apply.

Of course, if you're simply looking to open a brand new cash ISA, you won't need to worry about this.

Top rates for instant access

To start off with, let's take a look at the top five instant access cash ISAs:

The clear winner here is the Santander ISA, which is offering a fabulous interest rate of 3%. However, this does include a bonus of 1.5% for the first year, so you may find that this account is no longer competitive once that first year is up. You'll also have to be able to transfer in money from previous ISA years, as it requires a hefty minimum deposit of £9,000. Anything under that, and the rate will drop to 2%.

If you do have a smaller deposit, the Standard Life Direct Access Cash ISA could be a better bet - offering an interest rate of 2.65%. Just remember that this rate is variable, so it could change at any time.

If you'd prefer to have a bit more security, the First Direct Cash e-ISA might be more up your street. That's because although it's instant access, it pays a fixed interest rate of 2.50% until 30 June 2011. Of course, once that period is up, you'll need to move your funds elsewhere because the rate drops to a paltry 0.2%. But at least you'll know that until July 2011, you're guaranteed the 2.50% interest rate. And if ISA raftes rise across the market this year, you can also immediately transfer your funds.

Interestingly, if you need to transfer funds across from an existing cash ISA, this doesn't mean you'll be stuck with a lower rate of interest than if you were opening a brand new cash ISA. In fact, the opposite appears to be true, with the top two cash ISAs in the tables both allowing transfers in. So there really is no reason to keep your cash in lots of different ISAs.

Just remember that to protect the tax-free status of your money, you should never withdraw cash from an ISA to invest in another account. Instead, you should ask your new provider for a form that will allow you to transfer the money directly into your new ISA.

Fixing it

If you know you won't need immediate access to your funds, you may prefer to tie up your money in a fixed rate cash ISA.  And of course, the longer you fix, the higher the rate of interest. So let's take a look at how these interest rates compare.

One year

If you're only prepared to tie up your funds for one year, the highest paying cash ISA is the Bank of Cyprus Cash ISA Bond which is offering an interest rate of 3.33%. You can transfer funds in from existing ISAs and you only need a deposit of £1. Just remember, you won't be able to make any withdrawals during that year.

Two years

If you're looking for a two-year fixed cash ISA, you could consider the Nationwide Two Year Fixed Rate ISA Bond, which pays an interest rate of 3.50%. You'll only need £1 to open the account, but once you've made your initial deposit, you won't be able to make additional deposits. That said, you can open another cash ISA the following tax year. Transfers from existing cash ISAs are permitted.

Three years

The best three-year cash ISA is the M&S Money Cash ISA, which offers an interest rate of 4%. You'll need a minimum deposit of £500, and transfers from existing ISAs are permitted.

Four and five years

If you want to lock away your money for even longer, you could consider a four or five year fixed rate ISA bond. Personally, however, I would be reluctant to do this, as interest rates are bound to increase before then, and you might find that a competitive rate today will be very uncompetitive in the future.

However, if you are looking for a four-year cash ISA, the highest paying account is the Halifax Fixed Rate ISA Saver, at 4.25%. Again, transfers from existing cash ISAs are permitted. You will need a deposit of at least £500, but once you've made your initial deposit, you won't be able to make further deposits.

Finally, the Nationwide Five Year Fixed Rate ISA Bond pays a rate of 4.50%, with terms and conditions the same as those for the two year ISA bond mentioned earlier.

Don't forget that the amount you can save into a cash ISA increases next year, from £3,600 to £5,100 (it's already increased for those aged 50 or over on April 5th 2010). You can download a free guide explaining how you can benefit from the new rules here.

If you need help getting into the savings habit, why not register on lovemoney.com and adopt this goal: Build up your savings? Next, watch this video: How to... save when you've got no money. And then, have a wander over to Q&A and ask other lovemoney.com members for advice. Happy saving!

More: Get into the savings habit in 2010 | Top 10 ISA myths