Deal of the Week: 7% Cash Isa

What’s the deal?

A rate of 7 per cent on a cash individual savings account (Isa), fixed for a year, from Saffron Building Society, an East Anglia-based mutual.

The society’s Regular Saver Cash Isa allows deposits of up to £300 a month, with a minimum of £25.

The tax-free account runs for 12 months, after which time accumulated funds are transferred into Saffron’s Easy Isa, which currently pays 0.85 per cent.

The deal is available to savers who have yet to take out a cash Isa this tax year. The mutual will also accept post-dated applications for the 2009/10 tax year – at the same top rate – from those who have already used up this year’s allowance. The account is available nationally.

Access to savings during the 7 per cent period is subject to 180 days’ notice or loss of 180 days’ interest, though accountholders can also vary monthly payments – reducing them to £25, for example, if they are short of cash.

Is this good?

With the base rate now just 1 per cent, most top-paying Isas offer little more than 3 per cent – so 7 per cent is high. The fixed rate also protects against further rate cuts.

The deal looks particularly attractive for Isa savers who don’t have a lump sum to invest. But those who miss a monthly deposit are transferred into Saffron’s lower-rate Easy Isa.

The account gives membership of the society and so also offers the potential for a windfall if Saffron were to be taken over by another mutual or were to demutualise.

What’s the catch?

Isa savers cannot invest their £3,600 allowance at outset, nor can they switch previous years’ Isas into the new account. This limits the value of the 7 per cent rate. Savers putting in £300 a month will earn total interest of £136.50 over the year – equivalent to the return from a 3.8 per cent rate on a £3,600 lump sum Isa, according to Defaqto, the research firm.

Savers who open an account this tax year will also only be able to invest a maximum of £600 of their cash Isa allowance – £300 for each of the remaining months before April 5. They will then be committed to using their 2009/10 allowance in the same deal.

What’s the alternative?

Lump sum Isa savers can lock in to fixed rates of up to 3.3 per cent currently. The highest variable-rate accounts pay slightly less, according to Moneyfacts.co.uk, the rate comparison service.

Analysts also expect a range of Isa offers to be launched
in coming weeks before the end of the tax year, aimed at attracting last-minute savers and early-bird investments for 2009/10.

First Direct also has a 7 per cent Regular Saver Isa, but this is open only to savers with a current account with the bank.

How do I find out more?

0800 072 1100 or www.saffronbs.co.uk

www.firstdirect.com