Cash and equity ISA round-up
The deadline for using your ISA allowance is nearly upon us, yet over 50% of Moneywise.co.uk users say they still haven’t invested their full allowance.
The Moneywise survey found that although 49% of users have utilised their full ISA allowance, 25% have not invested a single penny this tax year. A further 6% have put some money into an ISA but do not intend to invest any more before 5 April, when the current year ends.
However, 21% of users say they have invested some money into an ISA this year and intend to invest more before the deadline passes.
If you are a new cash ISA customer then choosing the best rate is important - but if you want to move money from an old ISA across without losing your tax-free status then it is important to find an account that allows transfers.
And if you are looking to take advantage of your full ISA allowance this tax year or the next, but are concerned about the state of the global equity markets, then picking a strong asset class that will perform well could be a priority for you.
During the current tax year 2007/08, you can invest up to £3,000 in a cash ISA, with the allowance increasing to £3,600 after 6 April.
The best headline rate for a cash ISA is currently offered by Barclays Bank. Its Tax Haven ISA pays an AER of 6.5% and the minimum deposit is just £1. Savers do not have to give any notice to withdraw cash of £10 or more.
However, it is worth bearing in mind that the rate includes a 1% bonus for 12 months. In addition, transfers from other ISAs are not permitted with this account.
Another attractive product on the market is from Birmingham Midshires, part of the Halifax group. Its instant access ISA pays 6.35% AER but you will need to invest at least £1,000. The account also promises to beat any rate on ING’s Direct Cash ISA by at least 0.25% until 01/01/2010.
The account allows unlimited deposits up to the current ISA allowance, but is only open to new investments for the tax year 2007/08 – so transfers are not allowed.
Unlimited withdrawals are allowed but - as with other ISAs - funds withdrawn cannot be paid back.
If you want to make a transfer into a new ISA and are willing to give 30 days' notice for withdrawals, then Scarborough Building Society offers an account paying 6.3% on deposits from £1,000.
Although you have to give notice to access funds, there is no penalty for doing so.
Alliance & Leicester’s Direct ISA also allows transfers in. If you have at least £1 to invest then this account pays 6.25% AER, although the rate includes a 1% bonus until 31 May 2009.
A&L also offers savers 24/7 instant access to the account via online and telephone banking.
Another society that accepts ISA transfers is Loughborough Building Society, although it also requires 90 days' notice for withdrawals. The account pays 6.1% AER on deposits from £1.
All the above ISAs have variable rates, meaning you could be affected if the Bank of England cuts interest rates.
To avoid this, you could consider opting for a fixed rate ISA.
Cheshire Building Society has launched a fixed rate ISA paying 6% AER for 12 months on deposits from £1,000. The account does allow transfers, but after you have made your initial deposit you cannot pay in or withdraw any money for the life of the account.
Because fixed ISAs lock away your cash for a set period of time, it’s important to get the best possible rate.
Halifax currently comes out top in the best buy tables with its four-year fixed ISA paying 6.2% AER. The account does allow transfers but you must be willing to invest the money for four years and be prepared to put away the full £3,000.
If you want a shorter term on your account and have at least £3,000 to put away, then Julian Hodge Bank has a one-year account fixed at 6.15%. Transfers are accepted and you will be able to access your cash at the end of the fixed period for free.
Northern Rock also offers a one-year fixed rate account paying 6% on deposits from £1. Again, transfers are allowed.
If you want to use more of your 2007/08 ISA allowance by investing in a stocks and shares ISA, then bear in mind that some investment firms have application deadlines that fall before 5 April.
According to research by Virgin Money, cash ISAs are being opened at the rate of three to one against equity ISAs as savers are scared off by stockmarket volatility in the run up to the end of the tax year.
It says that more than 7.38 million cash ISAs were opened during the current tax year compared with 2.49 million equity ISA accounts. And even though savers can put more money into equity ISAs, around 2.5 times more is being invested in mini cash ISAs compared with equity equivalents.
But investors keen to take advantage of ISA tax breaks should not discount equity ISAs – analysis by Virgin Money show shares, on average, outperform cash investments over a three or five-year period.
From 6 April the maximum ISA investment will increase to £7,200 per tax year. Investors with cash ISAs will also be able to convert them into share ISAs without affecting their tax-free limit.
So, where should investors put their money? A poll by James Hay found IFAs tip Asian equities (excluding Japan) and the emerging markets as the two asset classes that will perform the best in 2008.
But over the longer term, the poll forecast that UK equities will outperform Asia, moving into second place behind the emerging markets.
James Hay says its poll also found that, throughout 2008, UK residential property, UK commercial property and US equities will be the worst performers.
Over the next five years, IFAs predict UK government bonds, UK corporate bonds and cash investments will be the worst performing asset classes.
James Hay's expected best performers:
|Position||Expected top performing asset class 2008||Expected top performing asset class over five years|
|1.||Asian equities (excluding Japan)||Emerging market equities
|2.||Emerging market equities||UK equities|
|3.||UK equities||Asian equities (excluding Japan)|
|4.||Eastern Europe equities||Eastern Europe equities|
|5.||Cash investments||Western Europe equities|
|Source: James Hay 19/03/08|
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.