Banks have robbed Isa savers of £1.2 billion in interest since 1999 by manipulating their rates, wiping out much of the benefit of the tax breaks.

The rates on Isas that topped the tables in previous tax years have been unashamedly downgraded after banks pulled in billions of savers’ cash, according to a survey by data firm Moneyfacts. Not one of the best-buy Isas from the previous eight years is now paying a top rate.

The ploy has wiped out much of the tax breaks available on cash Isas — savers have a total of £125 billion in the schemes on which they pay no income tax, which is worth £1.3 billion a year.

Lisa Taylor at Moneyfacts said: “The government is trying to encourage people to save, but what’s the point if your tax breaks are just disappearing into banks’ pockets.”

The figures come as a You Gov poll of more than 2,000 people for The Sunday Times reveals that a clear majority, 56 per cent, think they are being ripped off by banks and building societies over interest rates. And 83 per cent think bank profits and charges are excessive.

Banks are already up to their usual tricks ahead of this year’s Isa season. You must invest your Isa allowance before April 5 each year, and banks regularly capitalise on the last-minute rush by launching eye-catching deals that are subsequently slashed when they have attracted enough new business.

Alliance & Leicester has just launched an Isa that guarantees to pay 7 per cent until May 2008. However, it is only available to new Premier current-account customers, and after the guarantee the rate drops to 0.25 percentage points below Bank rate, or 5 per cent.

Meanwhile, its branch-based cash Isa is paying a derisory 3.91 per cent on balances up to £9,000 — only 0.46 percentage more than last summer, even though Bank rate has gone up by 0.75 points since then.

Cash Isa rates across the market have gone up by an average of just 0.64 points since August, according to Moneyfacts, costing Isa savers £140m a year in lost interest.

Smile, owned by the “ethical” Cooperative Bank, is among the worst offenders. Its cash Isa launched with a market-leading rate of 6.5 per cent in October 1999 — 1.25 points above the Bank rate of 5.25 per cent. It topped the best-buy tables throughout 2000 and much of 2001 and raked in billions of pounds of savers’ money, but Smile then began reducing the competitiveness of the account.

It failed to pass on the quarter-point rate rises in August and November, and while it put up rates by 0.25 points after last month’s hike, customers are earning just 5 per cent with a Smile current account or 4.25 per cent without.

Northern Rock’s 30-day Isa is another culprit. It was a best buy in March 2001, paying 7.05 per cent against a Bank rate of 5.75 per cent. The rate included a six-month bonus of 0.7 points, so the standard rate was 6.35 per cent. The account now pays 4.25 per cent — one point below Bank rate.

The Isa con is just the latest example of how banks manipulate rates to shortchange savers. Last week a report from Credit Suisse, an investment bank, provided a rare insider’s account of exactly how banks profiteer. It estimated that, this year alone, banks will makea staggering 5 per cent of their profits, or £1.3 billion, by raising savings rates less than Bank rate.

For the first time, the report estimates exactly which banks benefit most from the ploy. Lloyds TSB comes out as the worst offender — it is expected to make 7 per cent of profit before tax, or £270m, from rate manipulation.

Not one of its variable-rate savings accounts pays more than Bank rate. Its Reward Savings account, for example, pays between 0.1 per cent and 3.4 per cent if you make no more than two withdrawals a year.

Lloyds claims its accounts are competitive. The Credit Suisse report also lifts the lid on how banks shortchange current account customers. We have an estimated £100 billion in current accounts, but banks are expected to rob them of £800m in interest this year alone because they rarely pass on Bank rate rises.

Advisers said savers caught in one of the Isas that have been downgraded should switch now. Sue Hannums at AWD Chase de Vere, an adviser, said: “Many savers don’t realise they can transfer their Isa money into another account without losing the tax break.”

National Savings & Investments’ (NS&I) Direct Isa has a great deal for new money at 5.8 per cent with no short-term bonus. However, it does not accept transfers.

The best deal for transfers is Kent Reliance’s Direct Isa, which is paying 5.71 per cent on balances above £1. Yorkshire building society’s E-Isa also looks good at 5.65 per cent. Both building societies have passed on the past three rate rises in full.

Lise Cheron, pictured, a 29-year-old IT worker from Wrexham, North Wales, is in the process of transferring her Isa savings from Smile to Yorkshire building society.

She said: “When interest rates went up again in January I realised that I hadn’t heard anything from Smile about my Isa rate for ages. I had a look on moneysupermarket.com and was shocked to see that it was way down the best-buy tables — it had been a leading rate when I took it out about four years ago.

“I’m in the process of transferring my savings to Yorkshire building society and will keep a much closer eye on rates in future.”

Let us know if you are unhappy with your bank at timesonline.co.uk/moneyweblog

The Sunday Times you Gov poll

- Most people think they have been ripped off by banks and building societies on interest rates. A clear majority, 56 per cent, said they had experienced bigger rises in mortgage rates than in the interest paid on their savings accounts. Only 7 per cent said that had not been their experience, showing that by eight to one people believe banks are exploiting rate changes to the disadvantage of customers.

- A big majority, 82 per cent, also think bank profits and charges are excessive, and only 9% believe the banks are entitled to make the kind of money they do for shareholders.

- A fifth of people have switched bank accounts in recent years because they felt they were getting a raw deal.

- An even higher proportion, 25 per cent, were not satisfied with their banks’ service and some were actively considering switching.

- Most, however, said they were likely to stay with their existing bank because of the problems associated with switching: 48 per cent of those dissatisfied said they were worried that the process might not go smoothly; 43 per cent thought all banks and building societies are as bad as each other; and 36 per cent said they did not have the time to switch, and suspected it would be a lot of trouble to do so.

Ways to get your own back

Most consumers have not switched bank accounts despite derisory rates of interest, according to the You Gov poll. We show how you can get your own back.

Switch your current account

Current accounts are one of the main ways banks and building societies boost profits because rate moves are not usually passed on and most people earn just 0.1 per cent on their money.

About 40 per cent of people have never switched current accounts even though consumers can earn more than 6 per cent with Abbey, Halifax and Alliance & Leicester.

Abbey’s Preferred In-credit account pays 6.3 per cent on balances up to £1,000 and 2.5 per cent on anything above that. Halifax’s high-interest account pays 6.17 per cent up to £2,500, although you only receive 0.1 per cent on anything above that.

A&L’s Premier Direct account offers an in-credit rate of 6.1 per cent until April 30, 2008, after which it is guaranteed to be one percentage point below base rate. Again, this high rate is only available up to £2,500 — you receive 0.1 per cent above that.

The best deal for larger balances is Cahoot, which pays 3.65 per cent on up to £249,999.

Switching current accounts isn’t as much hassle as many people believe. Your new provider will arrange for direct debits and standing orders to be transferred. The process should take about six weeks.

Dump your savings account

If your account is paying significantly less than Bank rate — which is now 5.25 per cent — and your provider has failed to pass on the recent rate rises in full, move your savings elsewhere.

If you want an easy-access account, Icesave has the best rate at 5.7 per cent. This is an internet-only account and the minimum deposit is £250. The rate is guaranteed to be at least 0.25 points above Bank rate until 2009, and no lower than Bank rate until 2011.

Another good deal is Anglo-Irish Bank’s easy-access account, which is paying 5.55 per cent. This is a telephone and postal account and the minimum deposit is £500.

If you are looking to switch your cash Isa, Kent Reliance has the best deal. Its direct Isa is paying 5.71 per cent. You can invest up to £3,000 a year in a cash Isa and the interest is paid tax-free.

Claim back unfair bank charges

If you have gone overdrawn by mistake — even by just a few pence — your bank will probably have charged you between £20 and £30. The Office of Fair Trading is investigating these charges and it is expected to rule that they are excessive and unfair.

Last year the banks raked in an estimated £4.5 billion from punitive overdraft fees, but many are refunding the money to customers who complain and some people have recouped thousands of pounds.

You can claim back any fees you feel have been unfairly levied in the past six years. If you do not have statements going back that far, ask your bank for copies. It must provide these within 40 days and cannot charge more than £10.

You should then write to your bank saying you object to the charges. You can download template letters at which.co.uk/ bankcharges. Two-thirds of customers who complained about unauthorised overdraft charges in 2004 received a full or partial refund, according to Which, the consumer lobbyist.

If your bank refuses to refund the fees you can take your complaint to the Financial Ombudsman Service or you can claim up to £5,000 through the small-claims court.