With ISA season now upon us, Confused.com is looking to answer all of your money saving queries over the coming weeks. On this occasion, we’ve recruited the help of Fair Investment to give you some tips on how to make the most of your allowance in a low interest environment.
Frustrated by low cash ISA rates?
With interest rates so pitifully low, thousands of people with cash ISAs are wondering just how much more punishment they can take. The trouble is, with the country only just coming out of recession, and market volatility remaining rife since the credit crunch, many are understandably scared about taking their money out of the safety-net of a cash ISA.
So what should I do with my money?
Savers disappointed with low cash ISA rates might want to consider transferring their money into a stocks and shares ISA before the ever-approaching 5 April deadline. Remember, everyone has an annual tax free allowance of £7,200 and it’s even better for the over 50s, who can invest up to £10,200.
Any existing ISAs can be transferred to another provider without losing their tax-free status or even affecting your annual ISA allowance. So, if you have been building up a tidy sum over the years and are disappointed with the returns, why not transfer it to another ISA account that may be more suitable for your needs?
However, it’s important to remember the golden rule: You should only withdraw your money from a cash ISA if you absolutely have to. Do so, and you'll immediately lose all the tax benefits you have built up over the years. If you’re unhappy with the performance or administration of your ISA, or if it no longer suits your requirements, just consider transferring it instead!
Scared of stocks and shares?
Many people have shied away from stocks and shares ISAs, either because they don’t understand them, or because they see them as high risk. If you’re timid about playing the stock market you can always transfer your cash into a better paying cash ISA. Despite the low rates, there are some decent deals available at present - the Newcastle Cash 120 notice is currently paying 3%, First Direct’s no-notice is paying 2.75% (including bonus) and Santander’s fixed rate cash ISA is offering 3.5%.
Confused about the options?
There are a wide range of products to choose from within an ISA wrapper, including structured products and funds. With such a vast array on offer, it can be hard to work out what’s best for you, so here’s a little help.
Structured products offer returns based on the performance of underlying investments, and are often linked to a stock market index such as the FTSE 100. Normally, these are fixed term investment products that offer income, capital growth, or a combination of both. On top of this, they also offer a predetermined level of capital protection, which is often popular with low-to-medium risk investors.
‘Funds’, meanwhile, is a very broad category and encompasses a broad range of options. Funds are pooled investments, where a fund manager invests into company shares on behalf of the investor. Here, the risk of investing in individual shares is reduced as the fund manager invests in a wide assortment of company shares. Funds normally have a fund aim, such as growth and/or income, and can invest in various geographical and specialist areas such as Europe or technology. You can choose to invest into just one fund or, for further diversification, a range.
There are also ‘funds of funds’, where the manager invests in other funds instead of individual stocks and shares - resulting in further diversification and, in theory, less risk. However, as there are two management levels in a ‘fund of fund’ structure, the charges are generally higher than standard products within this category.
Are funds the place to be?
According to Invesco Perpetual fund manager Neil Woodford, dividend-paying funds offer a good opportunity for growth. He has predicted that his High Income and Income funds - currently producing a dividend of around 4.2% - could offer 10% dividend growth over the next 12 months. Not only that, but recent statistics produced by the Investment Management Association (IMA) reveal that funds of funds popularity has hit an all time high, with £1 in every £10 invested in funds in 2009 going into funds of funds.
Why not mix and match?
If you’re thinking that you want to make the move into stocks and shares, but aren’t comfortable moving all your cash across, you can always mix and match - splitting your money between the two. You’re free to divide the capital as you wish, but remember that some providers have penalties for transfers, while others may only allow 100% of the capital to be transferred – so check with your provider. You should also note that it’s wise to maintain a proportion of your investments in cash to act as an emergency fund.
Don’t lose it, use it!
So, just to reiterate, the ISA allowance for stocks and shares is £7,200, and £10,200 for the over 50s - though the limit goes up to £10,200 for everyone from April 6th. Bear in mind, though, that you can’t carry your allowance over - if you don’t use it, you lose it, and there’s no limit on transfer amounts.
If your money is doing nothing for you, think long and hard, because transferring out of your poor performing cash ISA could help you really cash in.
Rachel Mason of is a money commentator for Fair Investment
If you have any more questions, or if there’s anything you think we’ve missed, then send them over to editor@confused.com by 5 March and we’ll try to answer them in our upcoming ISA Surgery.
