After more than seven years of holding the base rate at an all-time low of 0.5%, the Bank of England cut it in August to an even lower 0.25%.
Banks and building societies followed suit, slashing the interest they paid on their savings accounts. With the average rate on a tax-free cash Isa falling below 1% for the first time, cash savings don’t seem appealing. So is it time to move your cash into investments for better returns?
“August’s cut in the base rate prompted a big increase in the numbers of people transferring their cash individual savings account (Isa) to a stocks and shares Isa,” says Danny Cox, a chartered financial planner at Hargreaves Lansdown. “Yields (the income returns) on popular equity income funds and FTSE All Share index tracker funds are over 3% and far more attractive than cash Isas.”
If you want your savings to retain their Isa status, but the money to give you higher levels of income, you could switch to an innovative finance Isa (IF Isa) or a stocks and shares Isa.
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Your options for higher income
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.
With interest rates as high as 8.7% a year, an IF Isa is certainly tempting. However, your money would no longer be covered by the Financial Services Compensation Scheme, which protects up to £75,000 held on deposit in a cash Isa in the event of your 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.
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 and with minimal dividend tax.
The most popular equity income funds offer high yields (income returns on the investments). An example is CF Woodford Equity Income fund, one of Moneywise’s First 50 funds for beginners, which has a yield of 3.4%.
“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 Mr Cox. If you aren’t sure whether you can take the higher risk, then you should consult an independent financial adviser.
How to transfer the money
If you do decide to move your cash Isa savings into an IF or investment Isa, there are several things to consider. Firstly, are your cash Isas fixed-term? If they are, you could face a financial penalty for transferring your cash before the term is up.
Secondly, how much money do you want to move? If you have cash Isa savings that you have built up in previous tax years, then you can transfer as much or as little as you like to an IF Isa or Stocks and Shares Isa – allowing for minimum and maximum investment rules set by the Isa provider. But if you have opened a new cash Isa in the current tax year, then you have to transfer the whole amount and close the existing account.
Just remember if you withdraw money from your Isa it loses its Isa status and will count towards your annual allowance if you deposit it back into an Isa.
The next thing to consider is where you want to move your money. At present, the Financial Conduct Authority has only approved a handful of peer-to-peer firms to provide IF Isas.
These include Abundance, Crowdstacker and Crowd2Fund, firms that are generally seen as crowdfunders rather than peer-to-peer lenders. But there are more than 50 other providers waiting to have their licences approved.
Given that you can earn up to £1,000 a year tax-free using your new personal savings allowance, you may want to stick to a standard peer-to-peer account for now so you can go with one of the major providers, until they launch IF Isas. Moneywise’s top picks for beginners are Zopa, Lending Works and RateSetter.
If you want a stocks and shares Isa, then you need to decide which investment Isa platform you want to go with. To make this decision, you’ll need to weigh up the different fees and charges levied by the Isa platform as well as the array of investments on offer – some offer investment funds only, while others offer company shares too.
Once your money is in the investment Isa on your chosen investment platform, you will need to decide which funds to buy. Rather than investing it all in one go, which can leave you vulnerable to buying at the top of the market, consider drip-feeding it into the funds on a regular basis over a period of time.
This lowers your risk by help smoothing out any peaks and troughs in the stock market, plus it enables you to buy fewer investments when prices are high and more when prices are low.
For investment platform recommendations and advice on using them, whether you’re a beginner or more experienced investor, visit our guide to the best investment platforms for beginners.
Once you’ve decided which investment or IF Isa you want to transfer to, you need to contact that firm and apply for an Isa, stating that you want to transfer in existing Isa savings. The Isa provider will then arrange for your savings to be moved so that they don’t lose their Isa status.
Whatever you do, don’t withdraw your Isa savings with the intention of paying them into your new account. Once money has left an Isa, it loses its tax free status and if you pay it into another Isa it will count towards that year’s allowance.
It’s good to know you can change your mind if you find investing is not for you. A change to the Isa rules in 2014 means you can transfer money held within a stocks and shares Isa into a cash Isa. Just follow the Isa transfer rules and get your new cash Isa provider to transfer the money.
|Type of Isa||Provider/investment fund||Annual income|
|Instant access cash Isa||The Coventry||1.1%|
|Fixed-term cash Isa||Metro Bank 5 year bond||1.5%|
|Innovative Finance Isa||Crowd2Fund||8.7%|
|Innovative Finance Isa||Crowdstacker||7%|
|Stocks and shares Isa||CF Woodford Equity Income fund*||3.4% yield|
|Stocks and shares Isa||Artemis Global Equity Income fund*||3.1% yield|
* Member of Moneywise's First 50 Funds, source: Moneywise, 29 November 2016.
Finally, if you are anxious about abandoning your cash Isas, remember that you shouldn’t dump them completely. Stocks and shares Isas are for long-term savings – no less than five years ideally – and IF Isas are designed for longer term savings too. You should keep your emergency savings pot in cash so you can access it in a hurry, without fi nancial penalty.
Putting money into an Isa
Each tax year, you can put money into one of each kind of Isa. The tax year runs from 6 April to 5 April.
In tax year 2016/17, you can save up to £15,240 in one type of account or split the allowance across two or three types. For example, you could save £10,240 in a cash Isa, £2,000 in a stocks and shares Isa and £3,000 in an innovative finance Isa in one tax year.
Your Isas won’t close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your Isa accounts.