Money news, advice and predictions for savers and spenders.
By Jeremy Gates
The Chancellor Alistair Darling ducked the task of starting to cut public spending in this week's Budget, instead presenting a simpler, easier challenge to savers.
If you have spare cash and haven't used your Individual Savings Allowance (ISA) for the tax year ending April 5, less than ten days' away, you're mad!
That was the implicit message as Mr Darling predicted another £730 billion of Government borrowing by 2014/5. This figure will include £160 billion to balance the books this year. That virtually guarantees big tax rises after the election, whoever wins.
Get as much as you can beyond the taxman's grab. You can open a cash ISA with as little as £1, with many offering instant access if you need the cash later. But, of course, returns are better if money is invested for as long as possible.
Any capital gain is free of tax. This is also the case with most income derived from investments within an ISA wrapper - such as cash, shares, bonds and property funds.
In normal times, best-paying building society accounts are usually ISAs because interest is tax-free.
That has been largely lost since Autumn 2008 as many providers slashed ISA rates along with the others. However, most providers offer better terms on new ISA products. If you are in an old ISA product, it might be time to reboot into a new one for a better rate.
Malcolm Cuthbert, at financial advisor Killik & Co, says: "There is much that can be done to prepare for tough times ahead by using tax breaks like ISAs.
"The real benefit of an ISA comes from the wonder of compound interest, so relatively small regular savings over a period of many years can result in large ISA holdings, while investing regularly smoothes out the highs and lows of the market."
According to Killik & Co, if a couple had jointly invested the maximum permissible amount each year in ISAs and PEPs - the Tory version of the same thing - since 1987 (£343,200), a 5% rate of annual return would have generated a lump sum of £604,000 free of Capital Gains Tax.
And if a married couple invested their joint ISA allowance of £20,400 a year (£10,200 each) for the next 25 years, assuming a 5% real rate of return, this could grow to £1.022 million, or £1.186 million with a 6% return.
No wonder many see ISAs as preferable to pensions.
A few weeks ago, when the outlook for shares seemed rockier than today, I assumed many savers would want only a Cash ISA in 2009/10.
However, the advance of the London market has made equities increasingly attractive to investors.
For the current tax year, the ISA limit for over-50s investors is £5,100 for cash and £5,100 for equities. For under-50s, the limit this year is £3,600 and £3,600 respectively.
Although it is late in the day, new cash ISAs are still being unveiled.
After scrapping its market-leading ISA, paying 4.4% a year over three years, Nationwide BS has a new three-year product paying 4.15%, and a four year version paying 4.25%.
Other good payers are Yorkshire Bank and Clydesdale Bank, both promising 5% over five years on applications by April 1.
Leeds BS promises 3.5% a year for three years and 4.6% for five years, but savers can access up to 25% of their original capital at any time during the investment period.
Andrew Hagger at Moneynet tips Santander's variable-rate ISAs promise to pay 3% above base rate, currently 3.5%, for at least a year. Also attractive is Barclays' Instant Access account paying 3.1%. However, both these accounts allow no transfers in from existing ISAs.
Andy Hutchinson, from Nationwide BS, says: "In cash ISAs alone, the total amount deposited is around £200 billion. We estimate cash ISAs alone save over £680 million in tax over a year - a substantial saving."
Over the long term, however, equities usually outperform cash.
Graham Spooner, investment advisor at The Share Centre, says: "While see-sawing markets have left some savers wary of investing in equities, it is worth bearing in mind that returns from equities have consistently outperformed cash, decade-on-decade, over the last century, apart from the 2000s."
With Equity ISAs, the risks are obviously greater. Unlike cash, the value of shares and managed funds can go up or down.
Yet in 2009, sales of stocks and shares ISAs hit £2.8 billion - their best year since 2004. Perhaps low interest rates made stocks and shares more attractive than savings accounts.
For bold investors prepared to put an entire ISA in one company, the Share Centre currently tips Tesco as a good option for long-term, low-risk growth investors.
It also likes Vodafone, which attracts both income and growth seekers. Also, as a higher risk it backs pub chain Marstons - where food sales are key to growth. Pubs are expected to do well in 2010 as drinkers gather for the football World Cup.
Investors who fly by the seat of their pants might gamble on Man Group, the hedge fund giant, where the share price has fallen steeply because big investors have withdrawn some of their cash.
Man, amazingly, will pay a 12% dividend this year. That's a great return in a tax-free wrapper, but you must balance it with the prospect that Man's share price could fall lower before the company turns the corner.
For managed funds, The Share Centre tips L&G Dynamic Bond (low-risk); Invesco Perpetual High Income (medium) and First State Global Emerging Market Leaders (high).
When it comes to selecting funds for an ISA portfolio, the easy way is to pick from a list of a dozen or so provided by discount brokers such as Financial Discounts Direct. Then you aren't overwhelmed by the choice.
Discount brokers refund all, or most, of the initial commission. This can be as high as 5% if you go direct to the fund managers, but they don't offer financial advice. To get this saving, you must choose your own funds.
A typical approach is to balance funds invested in leading stock markets in London, the US, Europe and possibly Japan with those in emerging markets - the so-called BRIC countries of Brazil, Russia, India and China. Also, the growth among the BRIC countries should be more dramatic.
For these new economies, Ben Yearsley, at financial advisor Hargreaves Lansdown, likes First State Global Emerging Markets Leaders and Alliance BRIC Stars.
For traditional investors, he prefers the highly-regarded Artemis Strategic Assets, up 20% since launch in May 2009, and the £2.7 billion Newton Higher Income Fund, paying annual income around 6%.
There is also a case for Japan, where the market must one day emerge from the doldrums. Also, Jupiter's Emerging European Opportunities tracks new economies in Eastern Europe.
Investors seeking secure income like corporate bond funds, while funds invested in commodities, such as JP Morgan's Natural Resources Fund and BlackRock's celebrated Gold and General fund, will prosper for as long as gold, copper and platinum prices keep rising.
Patrick Connolly, at financial advisor Chase de Vere, urges caution in choosing funds instead of chasing high fliers.
"Start with core funds like Gartmore Cautious Managed invested in shares and fixed interest, Artemis Income invested in large UK companies paying good dividends, and M&G Corporate Bond", he says.
"As your portfolio grows, add global equity funds such as Cazenove Europe, JPMorgan US, First State Asia Pacific Leaders, Jupiter Japan Income and JPM Emerging Markets."
Andy Hutchison, at Nationwide BS, says: "Before choosing any ISA, savers should consider their attitude to risk and the return they need.
"Depending on what they're saving for - a rainy day, emergency funds or a wedding - attitudes towards risks and returns for different pots of their money may differ."
At least Mr Darling did one thing to please ISA savers this week: for the 2010/11 tax year everybody enjoys the new annual limit of £10,200. This will rise thereafter in line with inflation.
:: Information: Discount brokers for ISAs include Financial Discounts Direct (0500 498 477 and www.financialdiscounts.com); Willis Owen (0800 597 2525 and www.willisowen.com); Chase de Vere (01225 368176 and www.awdchasedevere.co.uk); Hargreaves Lansdown (0117 980 0050 and www.H-L.co.uk); Share Centre (01296 414141 and www.share.com); Killik & Co (020 7337 0462 and www.killik.com).
Poundnotes
:: Which energy suppliers keep their customers happy? The April issue of Which? Money puts Good Energy top of the pile for high scores on customer service, online support and telephone. Following behind are Utility Warehouse (2); Ebico (3); Scottish & Southern Energy (4); Scottish Power (5) and EON (6).
The magazine says recommendations aren't based on price alone as Utility Warehouse and Ebico are around a third more expensive for duel fuel (gas and electricity) paid by monthly direct debit. Also, newcomer Good Energy comes out some 70% dearer for electricity (it doesn't sell gas).
Says Which? Money: "There is not much between the big six suppliers when it comes to price."
:: Credit card cheques which encourage customers to buy time in juggling their debts should be on their way out following the MBNA decision to stop issuing them on March 31, Andrew Hagger at Moneynet.co.uk says.
He adds: "While a credit card cheque might have offered a short term fix, it came at a hefty price. A £500 cheque can easily spiral by an additional £150 in fees (3%) and interest (28% APR) in just 12 months.
Mr Hagger wants other card companies to follow the MBNA lead.
:: Backing the Government move to help first-time buyers by scrapping Stamp Duty on home purchases below £250,000, HSBC is launching two best buy mortgages. Its fee-free lifetime tracker with maximum LTV (loan to value) up to 90% falls to 4.49% from 4.99%, while a new two-year fixed-rate mortgage at 2.99% for a maximum £250,000 loan offers an LTV limit of 70% with fee of £999.
Meanwhile, the Post Office has cut rates on its fixed-rate mortgages: The two-year fixed-rate (80% LTV) costs 4.15%; the three-year fixed-rate (LTV 60%) costs 4.09% and the five-year fixed-rate (LTV 80%) costs 4.89%.
:: Savers with long-standing ISAs should check the rate they are getting, says David Black at comparison service Defaqto. He says many cash ISAs pay only 0.10%, producing annual interest of £3.60 on £3,600.
Mr Black adds: "If you switch a £3,600 balance from an ISA paying 0.1% to the highest-paying ISA at 5%, you earn an extra £173 per year interest".
But switch carefully by contacting your new provider instead of your old one. This will help keep your tax shelter in place.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
AA 0845 603 6302 5.10% (F) Telephone Fixed Rate Bond Five Year Bond (T) £500 Yly
SAGA 0845 850 0664 5.10% (F) Fixed Rate Savings Five Year Bond (S) £1 Yly
Santander www.santander.co.uk 3.50% Flexible ISA Instant £1 Yly
Secure Trust Bank 0800 408 2020 3.25% 120 Day Notice Issue 1 120 Days £1,000 Quarterly
Barclays Bank 0800 494949 3.10% Golden ISA Issue 2 Instant £1 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.39% variable for term 65% £499 Yes
Earl Shilton 01455 844422 2.45% for 30 months 75% £599 Yes
Norwich & Peterboro BS 0845 300 2522 2.95% for three years 75% £695 Yes
Britannia 0800 013 2322 3.19% to 30/06/12 75% £999 Yes
Post Office 0800 077 8033 3.59% variable for term 80% £599 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
