ISAs offering best returns for savers

Friday, 19 February 2010 12:54

If you've been struggling to find the best return for your savings might now be the best time to look at an ISA. With the increase in thresholds taking place in the new tax year Kate Saines looks at the options for savers and finds stocks and shares ISAs might offer real rewards.

It's been ten years since ISAs were first unveiled. The tax-free savings plans, introduced as a replacement to the old Tessas, have certainly taken off in the decade with the number of accounts being opened since the 1999/2000 ISA year soaring by 53% according to Halifax.

Today over a third of UK households have an ISA, Halifax says, with the fastest growth in take up being among women and the under 25s.

Ask anyone with an ISA why they choose to put their savings into one of the accounts and most people will tell you it's for the tax benefits.

A Cash ISA allows anyone under the age of 50, at present, to deposit up to £3,600 per year without being charged a single penny in tax. An investment ISA, meanwhile, allows savers under 50 to provide a home for up to £7,200 worth of money whilst also having the potential to earn high returns.

In October the rules on ISAs were changed to allow the over-50s to place up to £10,200 into an investment ISA, of which £5,100 can be invested into a cash ISA.

This limit will apply to anyone over 18 when the new tax year starts in April.

However, falling interest rates and badly-performing markets have meant savings plans in general are not as appealing as they might have been several years ago.

And ISAs themselves have come under fire for not producing decent enough returns for savers.
The recent leap in inflation to 3.5 per cent has been described as providing yet more 'misery' for savers by price comparison site, Moneysupermarket.com. It says the combination of rising inflation and low interest on savings has meant there were few products available which would pay enough interest to offset inflation.

So, with such a dismal outlook, why not just stash your spare money out of reach from the taxman under your bed in a highly-secure box? Or put it on a horse at the 3.30 at Kempton?
Well, according to research, ISAs really are still your best bet if you are looking for most efficient savings vehicle.

Despite concerns about savings rates in general, Moneysupermarket's head of banking, Kevin Mountford, is now urging people to make the most of their ISA allowance as one method of actively seeking the best returns for their money.

"It's a no-brainer," he says, "to utilise your tax-free ISA allowance this year and next when the amount you can squirrel away in cash increases to £5,100."

So how do you make the most of your ISA allowance? Well, the most important thing is to understand how they work.

First of all you have until April 5 - the end of the tax year - to invest this year's allowance. If you miss the deadline you will miss out on this year's worth of tax-free benefits.

Once you know how much you would like to put aside in your ISA, you need to start searching for the best product to suit your needs and this also means finding an attractive interest rate.

You may already have an ISA and if the rate is good you might want to stick with it. If, having scoured the market you can get your hands on a better deal, find out whether you can exit your current ISA and whether the new ISA takes transfers. If you get the thumbs up on both accounts, make the shift.

Many Cash ISAs offer fixed-rates and will tie savers in for three-years, for example. So if you are only on year one of this ISA you will not be able to transfer your cash until the term has expired without paying a penalty.

Cash ISAs, which are most commonly provided through banks and building societies, also come in the form of variable rate products.

According to Moneyfacts research conducted at the end of January, the top variable rate Cash ISAs boasted rates of 3.01 per cent, 3 per cent and 2.82 per cent.

The top fixed-rate products, meanwhile, were paying interest at 3.33 per cent, 3.25 per cent and 3 per cent.

It found the number of fixed-rate ISAs on offer had more than doubled since last year and providers were offering short terms on these, with 68% of the products available for terms of two years or less.

Michelle Slade, Moneyfacts spokesperson, says: "The tide has turned and ISAs are seeing rate increases, while other savings rates are being cut.

"The tax-free element of ISAs is a real incentive to savers and is the reason they remain many savers' first port of call."

Cash ISAs, it would seem, are slightly more popular than investment ISAs. Halifax's research found 58% of ISAs were held in cash while 42% were in stocks and shares.

It's a turnaround since 1999/2000 when stocks and shares accounted for 90% of total ISA funds.
Savers with stocks and shares ISAs say they have not been impressed with the performance in the last two years.

Patricia Gannon, a 62-years-old grandmother from East Sussex, has most of her savings in a stocks and shares ISA, but in the last two years the value has fallen by £2,000.

Mrs Gannon is philosophical, however: "It's just the way the market is at the moment," she says. "Everyone is suffering the same predicament. We are hoping that if we keep the cash in there for long enough it will earn better returns over the long term."

And that really is the risk you taken when investing in stocks and shares. While your cash ISA is essentially a safe haven, by putting your money into the markets you face potentially big losses as well as big gains.

However, there are benefits. Placing investments inside a stocks and shares ISA, according to investment adviser The Share Centre, provides two tax advantages.

Sheridan Admans, an investment adviser for the firm, says: "First any profits made from share price increases aren't subject to capital gains tax.

"Second, it's free of tax on all UK investment income apart from equity dividend income tax, which is currently 10 per cent."

Investors can invest in a wide range of asset classes including single company equities, corporate bonds, government gilts, investment funds, unit trust, OEICs and investment trusts. You can even put your ISA wrapper around exchange traded funds.

Mr Admans advises, however, to make the most of your cash you should not stick to just one type of investment.

"We recommend investors hold a diverse portfolio of assets," he says, "as evidence demonstrates investing in a range of different asset classes can help iron out market peaks and troughs throughout time."

How these are split depend on the investor's personal circumstances - issues such as their attitude to risk will be taken into account.

Mr Admans says anyone thinking of investing in a stocks and shares ISA should consider the provider's charging structure and exit penalties.

And he says it is important to find out whether they would be tied to the provider's preferred portfolio of investments, or whether they could access a broader range of assets in the marketplace.

Another advocate of the ISA, Mr Admans thinks now is an excellent time to be not only using your ISA allowance but to be putting your cash into stocks and shares.

"With interest rates at historic lows it is imperative investors make the most of their ISA allowance and shelter what they can from the taxman."

He adds: "When the 2010/2011 tax year starts, all investors over 18 will be able to take advantage of the additional allowance. With this in mind, now could be a good time for those wanting to make the most of their tax-free allowance to accept some risk and invest in the stock market."

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