ISA: Be prepared to swap to get the best deals

Are you pleased with the performance of your individual savings account (ISA)? Has it made you a significant amount of money over the past 12 months – or is it worth considerably less than at the start of 2010? If you're unsure about the answer to these two questions, then it's time you took a look. Financial commentators claim millions of people are sitting in cash ISAs paying shockingly low rates of interest, or stocks and shares ISAs that have failed to live up to expectations.

According to Julie Smith, savings analyst at the Fair Investment Company, many people are particularly lured by attractive introductory rates into cash ISAs – but then they don't switch when these special offers come to an end. "These savers are really losing out by leaving their money in poorly paying accounts, because the initial offer was good or because they simply don't check their rate and have no idea it is no longer as competitive as they thought," she says.

The rules of changing

The good news is that it's easy to change to a better deal – although the process is governed by a number of rules. For example, money can be moved from cash ISAs into stocks and shares ISAs, but not the other way around.

It must also be transferred, rather than withdrawn and then reinvested, otherwise it will be treated as a fresh investment when paid into your new ISA and be subject to the usual annual limits.

In addition, you also need to read the small print as some ISA providers charge exit fees which, depending on the income you are expecting to receive, may mean the move isn't cost effective.

How to change your Cash ISA

Step one: Decide what you want

Are you happy to lock your money away for a number of years in exchange for a higher rate of interest, or is being able to get instant access to your cash reserves more important?

Step two: Explore your options

Find out what rates are being paid by other accounts. Comparison websites such as Moneysupermarket.com are ideal since they give you a snapshot of the entire market, including fixed and variable rate interest products.

Step three: Consider the small print

Rates may look great, but many will be inflated by short-term bonuses and some have constraints, such as not accepting transfers from previous ISA investments, so make sure you understand exactly what is on offer.

Step four: Apply to transfer

Don't just withdraw your money or it will lose its tax-free status. You will need to apply to transfer the funds, which your new provider can arrange. ISA providers are now required to transfer the money within 15 days, whereas previously it took on average of 26 days. Some – including Halifax, Lloyds TSB and Nationwide – guarantee to pay interest from the day they receive the application.

How to change your Stocks and Shares ISA

Step one: Consider your investment goals

What do you want your ISA investment to achieve? Are you looking to maximise the longer term gains that it can deliver or are you more focused on turning a profit in the short-term?

Step two: Seek financial advice

Get help from an expert who can advise you as to whether you are in the correct asset classes for your needs. Remember that buying a stocks and shares ISA is far more complicated than a cash ISA, where the interest rate is the principal concern.

Step three: Choose a provider

Look around the marketplace before settling with a provider. Some ISA managers, for example, give you cooling off or cancellation periods in which you can change your mind. It is also worth scrutinising the terms and conditions closely.

Justin Modray, founder of Candid Money, says: "When transferring, use a discount broker to minimise the likelihood of having to pay for repurchasing funds. Accept that your money may be out of the market for a few days if you're not re-registering."

Step four: Trigger the transfer

You will need to complete a transfer form with the new ISA provider, who will handle the rest of the process on your behalf.

Step five: Making future payments

From a risk perspective it may also be appropriate to invest in an ISA on a regular basis, especially if investing in equities, rather than one lump sum, in order to benefit from pound cost averaging.

Troubleshooting

ISAs are relatively straightforward – but there can still be problems. If you have an issue you will first need to take it up with the provider. If, however, you are still not satisfied then you can have it looked at by the Financial Ombudsman Service.

Rob Griffin explains how savvy savers can take advantage of the best offers without losing the tax-free status of their current nest egg