ISA TRAP THAT COULD COST YOU A YEAR’S INTEREST
Tempted to shift your nest egg to a better Isa in April? Be warned! If you switch accounts too soon you can lose hundreds of pounds
SAVERS eager to get the best interest rate are being urged to check the small print before emptying their Isas — or risk ending up with less than they started with.
Banks and building societies, unless told otherwise, will often move your money into low-interest accounts as soon as your Isa matures — so savers are usually keen to transfer their cash to a better rate as soon as possible.
But Money Mail has found banks and building societies will charge as much as 365 days’ interest if a customer is too quick to move their money before the rates plummet.
Savers with a £25,000 investment could lose up to £530 if they touch it even one day too early, while someone with £100,000 saved could lose up to £2,120.
Individual Savings Accounts (Isas) allow customers to save tax-free, putting away a maximum of £20,000 each financial year.
Millions of savers opt for fixed-term Isas because they usually offer better rates than easy-access deals. But these rates will usually drop dramatically when the term ends.
So if you are too slow to move the money, you could lose out on precious interest, and if you are too quick, you could face a hefty fine.
Money Mail reader Melville McGregor, 73, had been earning 2 pc on the £24,294 he had put in a threeyear fixed-term Isa with Nationwide, but the rate was set to plunge to 0.5 pc when it matured.
When he found a new deal with Charter Savings Bank paying 1.52 pc, he assumed it would take at least a week for the money to be moved.
But the transfer took only four days and he was hit with a £374 penalty — the equivalent of 270 days’ interest — when the money was pulled from his Isa before it had fully matured.
The retired architect only heard about the charge when a letter from Charter Savings Bank told him there was much less in his new account than he expected.
Melville, who lives in Epsom, Surrey, with wife Margaret, 73, says: ‘It’s a completely disproportionate fine. For just a few days it seems ridiculous.’
Meanwhile, John Thornton, 74, was charged £1,259 when he closed his Isa 16 days too early in 2017.
Nationwide wrote to John, who lives in Cheltenham, Gloucs, with wife Pamela, to let him know his Isa would be maturing — but it did not mention the early-access charge. It later refunded him as a gesture of goodwill.
John, a retired engineer, says: ‘It was a rude awakening for me. Pensioners like us need to be more wary and double- check these things — but banks should be obliged to make sure customers don’t make these mistakes.’
As an account’s fixed term draws to a close, savers should receive paperwork from their Isa provider with the maturity date. They should then start to shop around for the best rates on offer. Rates can change within weeks, though, so it is worth contacting an Isa provider to ask if they can hold the rate for you.
Online banking also now means transfers take just a matter of hours — or even seconds.
Tom Adams, head of research at advice service Savings Champion, recommends savers arrange to move their money on the day after the maturing date ‘to be on the safe side’.
He adds: ‘Where possible, it could be a good idea to contact the new and old provider so you are sure you will not subject yourself to charges.’
You should then note the date your new Isa will mature — so you’ll be ready for when the time comes again.
The warning comes as many savers prepare to start an Isa in the new financial year to make use of the annual £20,000 tax-free allowance — meaning many accounts will mature soon.
Rachel Springall, finance expert at Moneyfacts, says: ‘The season has started and people are going to be looking around, but if you leave a four- or five-year Isa, you could be fined up to a year’s worth of interest.
‘These penalties are harsher than many would expect, considering the return of Isas isn’t very high at the moment.
‘Isas are often seen as something special that people should have — but some customers can go into them a bit blind.’
All banks and building societies have to include information about early withdrawal and closure charges in their terms and conditions. Many remind customers of these charges shortly before their Isa matures — or at the point of withdrawing and transferring the cash.
But several complaints to the Ombudsman last year show that customers are still losing money by moving their cash too early.
Some savers could even end up with less than they invested if they withdraw all their Isa money too early. This is because some charges are set at a certain number of days’ worth of interest.
For example, Barclays one-year
Isa charges you 90 days’ interest if you empty it before it matures.
So if you take out your whole balance after less than 90 days, before any interest has been paid, you will end up with less money than you deposited.
Early exit charges for one-year Isas can vary from one to 120 days’ worth of interest.
Skipton Building Society charges savers the equivalent of 120 days’ interest if they move cash from their one-year Isa — which earns 1.36 pc — too early.
So a saver who transferred £25,000 today could earn £340 in a year, but would lose £112 if they moved their money too early.
The longest-term Isas typically have the largest early withdrawal charges. Leeds Building Society’s five-year Isa earns 2.12 pc but comes with an early withdrawal charge of 365 days’ worth of interest on the amount moved.
So a £25,000 transfer into the account would earn £2,764, but if you moved it too early you would lose £530. Nationwide and Skipton Building Society’s five-year Isas also come with a 365-day charge.
These figures are based on the early exit charge being calculated from the opening balance — as if any interest had been moved to another account.
Nationwide says it has refunded Melville’s charge as his mistake was a ‘genuine oversight’. A spokesman adds: ‘The instruction we received from Charter Savings Bank was to transfer the funds immediately.’
A Charter Savings Bank spokesman said: ‘ Our online application pages for cash Isa transfers stress the need to wait until either the full notice period has ended, or until the existing provider’s maturity date is reached.
‘The default option is to wait and customers who want to transfer as soon as possible must opt in.’