Are gilts better than cash ISAs?
"Is it worth investing £3,600 in government bonds (gilts) instead of a cash individual savings account? If it is, how do I do this and which bonds or funds would you recommend?"
Ask the Professionals: Nick McBreen, an independant financial adviser at Worldwide Financial Planning, Cornwall, says:
Your question raises several key issues. You ask if it’s worthwhile investing £3,600 [the current cash ISA allowance, which increases to £5,100 on 6 October 2009 for the over 50s and April 2010 for everyone else] in gilts but make no mention of what you want from your investment.
Is your objective capital gain or are you looking for income?
Bonds are currently being vaunted by some financial pundits as the ‘holy grail’ for investors who are looking for an income without risk. But while gilts offer a high degree of security, they currently have very low yields. The problem, therefore, lies in reconciling the value of the bond to you with the volatility in the cost of living and inflation going forwards.
My advice is to establish what you’re trying to achieve with this capital, the level of risk you’re willing to take, and the timeframe you’re working within. It’s only when you fully understand the nature of the investment you’re considering, and the risk, that you can make a sensible decision.
How you make your investment is also key to your financial planning. So if you already have an independent adviser, then seek their advice first. If not, you could consult a stockbroker or use an online facility from one of the many providers offering this service for self-select investments.
Just remember you can still take advantage of the ISA tax break by putting your bonds into a stocks and shares ISA.
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.
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 increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.