15:52 20 March 2013
Paying into a cash ISA is one way to help boost your returns because the taxman won't be able to keep any portion of the interest you earn for himself.
However, anyone who opened a variable rate cash ISA a year ago could soon be in for a shock. That's because many of these deals have a bonus rate attached and once that bonus expires - typically 12 months later - the overall interest rate will drop dramatically.
In fact, research by our team at MoneySupermarket shows that the rate could fall as low as 0.25%. As a result, ISA savers who don't choose to switch to a better deal as soon as the bonus rate ends risk losing up to £500million this year.
The pros and cons of bonus rates
In a market where savings rates are tumbling, bonus rates do have a purpose. They offer savers a temporary shelter from falling rates by promising the interest rate won't drop below a certain level for a number of months, typically 12.
But banks aren't stupid. They rely on apathy to keep their customers and once the bonus ends, many savers can't be bothered to move their money elsewhere and instead leave their cash languishing in an account paying next to nothing.
Our research compared the top 10 ISA rates offered in March 2012 with bonuses due to expire, and found that savers could see their interest rates plunge as low as 0.25% once the bonus ends.
To put that into perspective, if you had invested your full ISA allowance of £5,340 for the 2011/12 tax year into the Halifax ISA Saver Online, which paid an annual interest rate of 3.00% in March 2012, you'd now have earned £160 in interest.
But given that the chunky 2.75% bonus is now coming to an end, savers will see their interest rate plummet to 0.25%, earning them just £13.35 in interest over the next 12 months.
Whatever you do, don't fall into this trap - the only way to avoid it is to take action and move your money to a better-paying cash ISA immediately!
The best options
Right now, in terms of easy access ISAs which offer a variable rate, the Cheshire Building Society cash ISA and the Santander Direct ISA both pay a top annual rate of 2.50%. Transferring your ISA balance to one of these accounts would earn you £137.50 in interest over a year - that's £124 more than if you left it with the Halifax ISA.
Watch out though - both of these ISAs come with yet another bonus rate of 2.00%. But while the Santander bonus lasts for 12 months, Cheshire's lasts until July 31, 2014. So jot down when the bonus expires and be prepared to transfer your money to yet another cash ISA once that date arrives.
If you'd prefer not to have the hassle of switching accounts every year, some variable rate cash ISAs come without a bonus. Virgin Money, for example, offers a cash ISA at 2.15% with no bonus. But remember that because the rate is variable, it could change at any time.
Alternatively, if you won't need access to your money for a year or more, you could choose a fixed rate option. But be aware many only allow you to make one deposit.
Metro Bank offers a one-year cash ISA at 2.25% and Halifax offers an ISA Saver Fixed at 2.50% for two years or 3.00% for three years. You'll need to move your money again once the term of the account ends.
Always ask your new bank to carry out an ISA transfer for you - don't be tempted to withdraw the money from your account as your cash will lose its tax-free status. Take a look at this guide to help you through the process.
Use up your full allowance
Time is almost up for those of you planning to use this tax year's cash ISA allowance of £5,640. You only have until April 5, so don't delay - you can't carry over any amount you didn't use into the new tax year.
Come April 6, you'll be given a brand new cash ISA allowance of £5,760. If you can afford to, it's well worth making full use of your new ISA allowance as soon as the 2013/14 tax year begins, rather than waiting to use it up later on.
Using our earlier example, let's say you have an existing cash ISA balance of £5,500 (£5,340 + £160 in interest). If you transferred this money to the Santander Direct ISA paying 2.50%, paid in this tax year's allowance of £5,640 on April 5 and next year's allowance of £5,760 on April 6, you would have £422.50 in interest by April 5, 2014.
However, if you transferred your existing balance to the same ISA, paid in this year's allowance of £5,640 on April 5 but didn't pay in next year's allowance until April 5 2014, you'd only have £278.50 in interest by the end of the 2013/14 tax year. As a result, you would lose out on £144.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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