Poor Returns On Cash
Disgruntles ISA Savers crack
A survey of 1,200 customers by finance website Moneysupermarket.com found 37% of respondents don’t intend to use their personal ISA allowance - a limit of £7,200 on an investment by anybody under 50, and £10,200 for anybody who reached their 50th birthday by April 5, 2010.
A quarter of this group didn’t understand ISAs, and another quarter said it can’t be bothered to save anyway.
However, Kevin Mountford, head of banking at Moneysupermarket.com, points out: “If you are a UK taxpayer, it makes total sense to utilise your tax allowance, to make savings work harder for you.”
When money is invested in an ISA, a tax-wrapper is created which means any capital gains, and usually income, are taken tax-free.
Since ISAs were launched in 1999, serious long-term savers have invested £170 billion in them, says Halifax.
Many financial advisors now regard ISAs that are invested in cash, shares, managed funds, bonds and property, as alternative pensions. They are more flexible than pensions, and they are obviously easier to withdraw.
Better off pensioners, for instance, get income tax-free through ISAs, which might be taxed at 40% if it was paid through state and personal pensions.
At any time, savers can switch savings accounts on cash ISAs held within the wrapper to get more interest, or buy and sell shares and managed funds to maximise capital gains and dividend income. They can also move ISA money from cash ISAs into shares, but not in the other direction.
One investor claimed to have built a £1 million fund within an ISA wrapper, by skilful share picking. If these shares hadn’t been held in an ISA, the profits could have been clobbered by capital gains tax.
With rates at such low levels, it’s hardly surprising some savers are too bored with cash ISAs to bother.
Andrew Hagger, at Moneynet.co.uk, says: “The average variable rate ISA currently pays 1.31% - against 5.28% in January 2008.
“While I appreciate that the tax-free status of your ISA savings is ring-fenced and carried forward for future years, consumers are hardly going to be falling over themselves with returns as measly as this.”
Hagger says the best buy for a one-year fixed rate cash ISA is 3.33% from Bank of Cyprus UK. Marks & Spencer Money offers the best variable rate ISA at 2.65% - paying £95.40 annual interest on £3,600, or £135.15 on £5,100.
Rates are better on ISAs which tie up your cash for several years: Leeds BS pays 4.6% on a five-year deal (min £1), Nationwide BS 3.65% over three years (3.95% for over-50s), while Aldermore’s two-year deal offers 3.6% on a minimum £3,600 investment.
However, all these offers involve locking up money through a lengthy period when rates are likely to rise. Five years from now, the return could look very poor indeed.
Equity ISAs, holding shares, bonds and managed funds are a puzzling prospect, so long as shares in London and globally reveal no clear trends. Nobody really knows if the global financial crisis has finished, or has only just begun.
Recent ISA investors have seen fortune favour the brave. Some wise - or lucky - investors who bought ISAs this time last year have seen the value of their holding surge 20-40%, depending on where they invested. Inside an ISA, this huge gain is tax-free.
Private client investment manager Brewin Dolphin says ‘savvy’ savers have been pouring cash into equity ISAs. Its clients have more than £151 million invested in equity ISAs today, against £86 million a year ago.
Rob Burgeman, Brewin Dolphin divisional director, says: “There has never been a better time to make the most of tax-free savings vehicles.
“ISAs offer the best of both worlds, with equity ISAs so popular due to the low interest rates which we are currently experiencing. Brewin Dolphin has seen more than a 40% increase in ISA subscriptions this year - reflecting the move from cash into equities.
“For over-50s, there is the added attraction of a rising ISA allowance as shares staged a global recovery.”
Over-50s rushed to take advantage of raised limits for ISA allowances last autumn. The Investment Management Association (IMA) says a record £23.6 billion went into investment funds in the first 11 months of 2009, more than 10 times the figure for the same period of 2008.
Few investors have the confidence to put a single share into an equity ISA. Most of us choose funds, targeting sectors which look most promising, with emerging market countries such as the BRICs - Brazil, Russia, India and China.