While some will gain in bank's Isa review, don't sit back if you are one of the losers – find another account
More than a million people with money in a NatWest or Royal Bank of Scotland cash Isa are about to receive a savings shock: their interest rate is being cut by up to 1%. Some customers will see their rate halved after the largely state-owned RBS decided some Isa customers are enjoying returns that are "unsustainable in the current market".
However, there is good news for a further 1.9 million RBS/NatWest cash Isa holders – they will shortly benefit from a rate increase of up to 1%.
During the next few days, 3 million customers will start to receive letters confirming whether they are a winner or a loser as a result of the banking giant's decision to "simplify" its range of accounts by moving everyone with an older cash Isa on to a single product. But don't just sit back; instead, use the opportunity to review your Isa holdings and, in some cases, to switch to a better-paying account.
Cash Isas have been around for 14 years, but many savers are unaware they can transfer their Isa while retaining its tax-free advantages. Too many people simply open an account and forget about it, only for the interest rate to dwindle to nearly nothing. Transferring your funds, however, is easy. But be aware that some cash Isas don't allow transfers in from existing Isa accounts.
In July, RBS/NatWest cut the number of cash Isa products on sale, so each brand now has just one: Cash Isa (NatWest) and Instant Access Isa (RBS). These variable rate accounts pay 1% to new customers who invest between £1 and £24,999, and 1.5% on £25,000-plus. Now the bank is looking at its older Isa accounts which are no longer available to new customers. It is ditching seven of these (including Cash Isa Plus, e-Isa and RBS's 60 Day Isa) and moving customers on to either a Cash Isa or Instant Access Isa.
David Crawford, RBS's head of savings, says that the majority of customers "will benefit in some way". Some people, for example those with more than £25,000 in RBS's 60 Day Isa, will see their rate jump from 0.5% to 1.5%.
Howeer, 1.1 million people will see a reduction in their rate when the changes take effect on 31 January. For example, the e-Isa pays up to 2.25%, while Cash Isa Plus pays 2% from £1.
However, the bank is awarding an interest bonus of 0.3% for six months to its "most loyal and valuable customers". Another positive is that all restrictions attached to some of the older accounts – for example, some could only be operated online – are being removed.
So where should you transfer to at the moment? The highest rate cash Isa deal is from Virgin Money, paying 3%, but it comes with a hefty lock-in until 2018 (or lose six months' interest when withdrawing).
The best shorter term fixed Isa, pegged for two years, comes from Britannia, with the rate set at 2.05% until the end of October 2015, but it's only marginally better than the 1.91% Virgin Money pays on its one-year Isa.
If you are happy with a variable rate Isa, which may (but is not guaranteed) to rise if the Bank of England puts up rates, then consider the 1.8% deal from Kent Reliance and the 1.75% deal from Virgin Money. The NS&I deal at 1.75% looks attractive, but it won't accept transfers in, while the Post Office's 1.8% rate is also at the top of the table, but after 18 months drops to 0.9%. Don't forget to keep all balances held at one institution below £85,000, as this is the compensation limit if the worst happens.
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