In the land of low rates, this cash plan is king

With the stock market in turmoil, sales of equity ISAs have plummeted as investors seek safer financial havens.

Staying in cash seems the obvious solution to share volatility. But with the Bank of England base rate at just 3.75 per cent – its lowest level for nearly 50 years – investors are getting precious little in the way of returns from traditional savings accounts. So it's no wonder that sales of mini cash ISAs have been more popular than ever this year. Not only are rates generally higher than on most conventional savings accounts, the fact that returns are free of tax means investors' money is working even harder.

Each person can save up to £3,000 each tax year in a mini cash ISA. Many are instant access, so you don't have to give notice when you want to get hold of your money. However, some do require notice, so be careful to read the terms and conditions when choosing an account. If you opt for an instant access cash ISA, it will be a good home for money you put by in case of an emergency.

The best rate currently available is 4.2 per cent from Kent Reliance Building Society; the minimum you can invest is £1 and it gives instant access. Safeway is also offering 4.2 per cent and instant access on balances of £10. Moneysupermarket.com, a website that compares the cost of financial products, lists hun- dreds of cash ISAs, making it a useful resource for finding the best deal on the market.

Keith Milne, a 58-year-old consultant from Perthshire, chose a cash ISA from Safeway, into which he invested his full £3,000 allowance. He was put off investing more money in stocks and shares because the market has been so disappointing. He plans to put a further £3,000 into his Safeway ISA in the next tax year if things don't improve.

"I chose Safeway because it has an attractive rate and it's instant access so it's flexible," he says. He also likes the fact that the Safeway ISA has CAT status (low cost, easy access, simple terms).

"This gave me a benchmark by which to judge the product," continues Mr Milne. "It didn't have any obvious trip wires and offered me a short- to medium-term punt against the vagaries of the stock market. With the tax year coming to an end, I thought it was a better bet than doing nothing with my money.

"The other thing that puts me off shares at the moment is the upfront charges and management fees, which make the returns very marginal. With all the uncertainty of the market, I have become a bit cynical about the whole thing."

Taking time to choose the right cash ISA is important because you can't open another one within the same tax year and switch your money over.

"At this time of year, investors are under pressure to take advantage of their tax- free allowance before the 5 April deadline," says Stuart Glendinning, director of Moneysupermarket.com. "With so many different cash ISAs available, it is very important that people get their ISA choice right first time and get the best deal. Once a cash ISA has been opened, consumers cannot open another until the next tax year, so they should take a few minutes to shop around for the best rate."

It is important to keep an eye on the rate of interest on your cash ISA as many providers offer a good headline rate before slashing it once customers have signed up. The hope is that you won't want to go through the trouble of moving again.

But switching to another ISA as soon as you are allowed to is simple and should be done if a rate cut demands it or a new ISA is launched with a much better rate. To minimise risk, you could opt for a provider which promises its interest will stay inside a certain limit from the base rate.

Safeway guarantees that its cash ISA will never be lower than 2 per cent below base rate, for example, while internet bank Intelligent Finance makes the rather more useful promise that its ISA will always be at least 0.3 per cent above base rate.

Of course, you don't have to wait until the end of the tax year to invest in a mini cash ISA. Most providers accept monthly payments, so you could set up a direct debit from your current account and pay, say, £50 a month into the individual savings account.

Contacts: Kent Reliance, 0800 783 4248; Safeway, 0800 995995.