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Will poor cash ISA rates shock you into stocks and shares?
Only one cash ISA has an interest rate above inflation and it has just cut the rate. Now might be the time to put your money in a stocks and shares ISA.
Prospects for savers in this year's 'ISA season' look bleak. Normally at this time of year, with the end of the tax year of 5 April approaching, banks and building societies woo savers with new cash ISAs with improved rates of interest.
Not this year. Last month Coventry Building Society, the only cash ISA provider left offering an interest rate above inflation, cut the interest rate on its 60-Day Notice ISA to 2.8% from 3.1%. It still pays a real return above inflation but only just given the consumer prices index (CPI) is stuck at 2.7%.
As things stand all other cash ISAs will lose you money as their rate of interest does not offset the impact of inflation, which reduces the value of your money over time.
The Coventry account is only open to new money (with minimum deposit of just £1), which means you can't even transfer other savings you may have to get this top rate. It's the same with the second-best cash ISA, the 90-day notice account from Earl Shilton building society which offers 2.7%.
If you want to transfer existing savings the best rate you will get from one of the top six providers (all building societies by the way) is 2.5% from Cheshire building society’s instant access ISA (minimum deposit £1,000).
According to Moneyfacts, the financial product comparison site, the number of cash ISAs has fallen to 309 from 385 in the past year, while the average interest rate paid has plunged to a miserable 1.74% from 2.55%.
As Peter Hargreaves, boss of Hargreaves Lansdown, the FTSE 100 company operating the country's biggest investment 'supermarket', pointed out yesterday, the government's Funding for Lending scheme is to blame.
The government has provided mortgage lenders £80 billion in cheap finance in a bid to boost mortgage lending. While mortgage lending has increased, the unfortunate side effect is that lenders are less reliant on attracting money from savers in order to fund their lending. The result is that competitive cash ISAs have dwindled away. Hargreaves condemned the government for this 'fiasco' which left savers in a terrible position.
Sylvia Waycot of Moneyfacts said: ‘New ISA accounts normally hit the market with a flurry of razzamatazz in early January but we are already in February and only a few accounts have trickled quietly into the market. Normally we would expect to see providers trying to grab our attention with headline rates but this year, while rates on some accounts have gone up, they have not generally risen by as much as they were recently reduced by.’
Waycot said the restrictions on transfers meant savers may have to juggle different pots of money if they want to get the best rate on their money. ‘If you are lucky enough to have saved in an ISA for more than one year, you might find an added complication because not all providers will allow you to move older ISAs into the new one. This means that you suddenly have to keep your eye on multiple pots of money.'
She added: ‘It doesn’t look like it’s going to be a bonanza ISA season this year, so if you see one you like, don’t hang around as a limited market always disappears fast.’
Time to invest in a stocks and shares ISA?
Hargreaves' criticism of the government came as his company reported record half-year results with a 30% leap in profits. Hargreaves Lansdown - and other investment websites - are seeing growing numbers of people starting to invest in stocks and shares ISAs, which while riskier, offer the prospect of a better return.
The question is, if you're not already considering a stocks and shares ISA, is it time to join in?
Just to remind you of the basics. In the current 2012/13 tax year you can save up to £5,640 into a cash ISA. That's half your total annual ISA allowance of £11,280. Alternatively, you can put the whole lot into a stocks and shares ISA.
Of course you may not want to put all your money at risk on the stock market. You may want to keep some 'rainy day' money in a cash ISA anyway.
That's absolutely fine but the unavoidable fact is that with interest rates so low if you want to have a chance of growing your money ahead of inflation you have to invest it in the stock market in some way.
The easiest way to invest is to find an investment fund that you can hold through your ISA. Here are a couple of videos from The Lolly Investor Programme that explain more about stocks and shares ISAs and investment funds.
What's a stocks and shares ISA?
How to pick a good fund for your ISA and pension
More about this:
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- The Lolly Investor Programme: what's a stocks and shares ISA?
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by Gavin Lumsden on Sep 12, 2014 at 17:41