Improving the returns on existing cash ISAs

There’s a certain self satisfied smile on the face of providers when you open a mini-cash ISA. This is because they assume they’ve then got your business regardless of whether they’re paying a decent interest or not. Wrong.

Mini-cash ISA are effectively savings accounts which there's no need to pay income tax on. The cash ISA allowance for each tax year is £3,000 so for that tax year 2002-2003 it's already poss. If you have money in cash ISAs there are three reasons to consider changing provider - to up the interest earnt; fix the interest rate; or linking your cash ISA returns to the stock market.

Like ISAs themselves the transfer rules are unnecessarily complicated. Transfers must be like for like, in other words a mini-cash ISA must stay a mini-cash ISA. Current year’s cash ISAs must be moved whole, but previous years’ allowances may be split between different providers.

Wealth Warning. There is one big warning when transferring. Don’t just withdraw the cash to switch, do that and you’ll immediately lose the ISA tax benefits. Instead, simply fill out a transfer form with your new provider and they will perform the move.

Choosing a new provider
Before you move check if your current provider has any transfer penalties, roughly one in three do. Small penalties, like 30 days interest aren’t a problem. However a few providers try to lock you in with higher fines for moving up to about £50 fee. It's worth considering whether the provider you are moving too has transfer penalties or you'll find yourself the victim of the same problem again in future.

Not all cash-ISA providers will accept transfers in, if you are checking out the newspaper or internet best buy lists then a quick phone call should ensure the provider will. Just like savings accounts it's possible to take advantage It is possible to fix the cash ISA rate, but you must be willing to lock the cash away and this means you’re taking a punt on future UK interest rate movements.

A special choice to up the risk – Guaranteed Equity Bond mini-cash ISAs

The final option for current cash ISA providers is a much less well known product called a Guaranteed Equity Bond mini-cash ISA. These allow you to up the risk on your cash ISA money and potentially massively up the return by linking your cash ISA to the stock market.

Their operations are quite simple. You buy one which usually lasts for five years, during this time your money is locked in. The returns at the end of that period are linked to the performance of one or more usually a combination of stock markets. However rarely do providers offer the entire returns, usually it's a fixed percentage up to a set maximum. A typical product would pay 70% of the returns of the FTSE-All share index, up to a mImproving the returns on existing cash ISAs

GEB mini-cash ISAs are not usually an option when first opening an ISA, as if investors want higher risk they can opt for a stocks and shares ISA. However once you've already plumped for a mini-cash ISA the transfer rules mean it is impossible to switch it into becoming anything else – and GEB mini-cash ISAs offer a good half way house.