Is now the perfect time to consider stocks and shares instead of savings?

Published by Heather Connon on 28 February 2017.
Last updated on 01 March 2017

After more than seven years of the base rate at an all-time low of 0.5%, the Bank of England cut the base rate in August to an even lower 0.25%.

Banks and building societies followed suit, slashing the interest they paid on their savings accounts. As a result, cash savings have never looked less appealing. Some people have managed to boost their interest rates by spreading money across high interest current accounts. But this requires time and effort to manage the strategy properly. It also means that your money doesn’t have tax-free individual savings account (Isa) status.

If you’ve contributed to an Isa every year for several years, you could have a big pot of cash sitting earning miserable rates of interest. This month specialist savings website Moneyfacts reported that the average one-year cash Isa rate fell by 0.02% for the third consecutive month to stand at 0.81%, and it was even worse news for the average no notice cash Isa rate, which slipped by 0.03% to 0.64%.

Meanwhile, the UK’s inflation rate has reached 1.8% for the year to January (the latest figures available).  This means if your interest on your cash Isa is less than 1.8%, your money is not holding its value.

“Cash Isas have arguably been eclipsed”

Jason Hollands, managing director of Tilney Group says: “Cash Isas are effectively a busted flush, offering dismal rates at a time of rising inflation which means negative real returns. Of course, everyone needs some rainy day money but even here cash Isas have arguably been eclipsed by the new tax regime for savings.”

Using the Personal Savings Allowance, basic rate taxpayers can now earn their first £1,000 of interest tax free (and higher rate taxpayers their first £500 tax free) on regular savings accounts. “That’s an awful lot of cash you can hold before worrying about tax on interest or needing to worry about cash Isas,” says Mr Hollands.

So is it time to move your cash Isa into investments for better returns?

If you want your savings to retain their Isa status, but the money to give you higher levels of income, you could switch some or all of the money to an innovative finance Isa (IF Isa) or a stocks and shares Isa.

Alternatively, if you wanted to, you could split this tax year’s Isa allowance. For example, you could invest £1,500 in a cash Isa, £10,000 in a stocks & shares Isa and £3,740 in an innovative finance Isa. Or do it the other way around. The only rule is that, combined, your tax free Isa savings in the 2016/17 tax year don't exceed the maximum limit for this year of £15,240.

What is an innovative finance Isa?

An IF Isa allows you to place peer-to-peer lending within an Isa wrapper, so your returns are tax-free. Peer-to-peer lending is where you lend your money directly to individuals and small businesses via a peer-to-peer platform.

The rates on offer from P2P lending range between 3% and 8%, which is certainly tempting. However, your money would no longer be covered by the Financial Services Compensation Scheme, which protects money held on deposit in a cash Isa in the event of a bank or building society going bust. So with an IF Isa, you are taking on the risk of losing some or all of your money in return for that extra income.

Note that Moneywise readers who have used peer-to-peer lending have had mixed experiences.

Also, there are only a few innovative finance Isa providers to choose from.

What is a stocks and shares Isa?

Within a stocks and shares Isa, you can hold a variety of stock market investments, such as company shares and investment funds. The Isa wrapper enables them to grow free of income and capital gains tax.

“Stock market investments are not for the faint hearted or for the short term – less than five years – as the value of your investment will fall as well as rise,” says Danny Cox, a chartered financial planner with Hargreaves Lansdown. If you aren’t sure whether you can take the higher risk, then you should consult an independent financial adviser.

You can invest in the stock market for growth or income, or both.

One popular first step into investing is to choose an equity income fund. These offer high yields (income returns on the investments), with the potential to grow your capital as well over the long term.

One of the best known equity income funds is CF Woodford Equity Income Fund, a member of the Moneywise First 50 funds for beginners, managed by star fund manager Neil Woodford. The fund has a yield of 3.3% and invests mainly in UK companies.

For income from companies around the world, our recommendation is Artemis Global Equity Income Fund, which has a yield of 3%. You could invest your Isa in both of these funds using a DIY investment platform.

Alternatively, consider Moneywise’s starter income portfolio. This consists of six fund, taken from our First 50 funds for beginners. 

Also using the First 50 Funds, we have put together four easy tracker fund portfolios for 2017 and beyond.


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