Personal Finance: ISA lolly not always sweet

TESSA FEVER may already be a fading memory, but savers should be queuing to open a cash ISA rather then leave money in a low-paying deposit account.

The cash ISA has effectively replaced the Tessa, although savers cannot keep quite so much from the taxman. The Chancellor is allowing savers to put up to pounds 3,000 in a cash ISA this tax year - but only pounds 1,000 in subsequent years.

The cash ISA is the first new product in years from National Savings - the Government bank - but its interest rate of 5.75 per cent on pounds 10 does not match offerings from banks and building societies.

In fact, loyal customers of financial institutions are being offered the best deals. Anyone who has been with the Coventry Building Society for at least five years, for instance, can get 6.5 per cent on a balance of just pounds 1. And it guarantees to pay 1 per cent over the bank base rate for two years on its Privilege ISA.

Newer customers, however, are offered the much less attractive Square Deal ISA, which pays just 5 per cent.

Others are playing the same loyalty card. Nationwide's Members ISA Bond is offering a similar guarantee to the Coventry and is paying 6.5 per cent at present. But anyone who hasn't been with the Nationwide for three years will have to settle for the standard ISA with the 1 per cent-over- base guarantee lasting until October.

Other providers are paying bonuses. Abbey National and Safeway, for instance, are offering a 0.5 per cent bonus payable in January while the Yorkshire building society is paying out a 0.5 per cent bonus in October.

But such offers are questionable, say competitors, as the bonuses may simply be designed to help catapult the companies to the top of the best- buy tables, in order to attract new customers in the first crucial months of the ISA.

"We understand that people's needs change and so products which come with `golden handcuffs' may not offer best value," says Chris Cummings, of Sun Bank. "In fact we believe these golden handcuff bonuses are against the spirit, if not the letter, of CAT standards."

The CAT standard - likely to crop up often with ISAs stands for charges, access and terms. "The CAT provides a benchmark for investors. They will be able to tell that their ISA has reached certain standards," says David Outhwaite, of NatWest.

Instant accessibility means ISAs offer more flexibility than Tessas, where cash had to be locked away for five years. However, many ISAs are demanding 30 days notice or allowing just one or two withdrawals a year.

Some product providers are refusing to issue an ISA. Sainsbury's Bank, for instance, says they are too complicated.

When you throw CAT standards into the mix, the picture becomes even less clear as they may make ISAs less competitive.

If you are planning to have an investment ISA as well, it may be tempting simply to take the cash element offered. This could, however, be a mistake, according to Jenni Stott, of Marks & Spencer Financial Services. "Many high street names and fund managers may offer a cash ISA to lure savers without a competitive rate of interest," she warns.

You can compare ISAs on the Internet at www.moneyextra.com - a free independent personal finance website