Money news, advice and predictions for savers and spenders.
By Jeremy Gates
With only weeks to go before the end of the current tax year, many savers are so disgruntled with poor returns on their cash that they will ignore the chance to put more of their money into ISAs before the April 5 deadline.
A survey of 1,200 customers by finance website Moneysupermarket.com found 37% of respondents don't intend to use their personal ISA allowance - a limit of £7,200 on an investment by anybody under 50, and £10,200 for anybody who reaches their 50th birthday by April 5, 2010.
A quarter of this group didn't understand ISAs, and another quarter said it can't be bothered to save anyway.
However, Kevin Mountford, head of banking at Moneysupermarket.com, points out: "If you are a UK taxpayer, it makes total sense to utilise your tax allowance, to make savings work harder for you."
When money is invested in an ISA, a tax-wrapper is created which means any capital gains, and usually income, are taken tax-free.
Since ISAs were launched in 1999, serious long-term savers have invested £170 billion in them, says Halifax.
Many financial advisors now regard ISAs that are invested in cash, shares, managed funds, bonds and property, as alternative pensions. They are more flexible than pensions, and they are obviously easier to withdraw.
Better off pensioners, for instance, get income tax-free through ISAs, which might be taxed at 40% if it was paid through state and personal pensions.
At any time, savers can switch savings accounts on cash ISAs held within the wrapper to get more interest, or buy and sell shares and managed funds to maximise capital gains and dividend income. They can also move ISA money from cash ISAs into shares, but not in the other direction.
One investor claimed to have built a £1 million fund within an ISA wrapper, by skilful share picking. If these shares hadn't been held in an ISA, the profits could have been clobbered by capital gains tax.
With rates at such low levels, it's hardly surprising some savers are too bored with cash ISAs to bother.
Andrew Hagger, at Moneynet.co.uk, says: "The average variable rate ISA currently pays 1.31% - against 5.28% in January 2008.
"While I appreciate that the tax-free status of your ISA savings is ring-fenced and carried forward for future years, consumers are hardly going to be falling over themselves with returns as measly as this."
Hagger says the best buy for a one-year fixed rate cash ISA is 3.33% from Bank of Cyprus UK. Marks & Spencer Money offers the best variable rate ISA at 2.65% - paying £95.40 annual interest on £3,600, or £135.15 on £5,100.
Rates are better on ISAs which tie up your cash for several years: Leeds BS pays 4.6% on a five-year deal (min £1), Nationwide BS 3.65% over three years (3.95% for over-50s), while Aldermore's two-year deal offers 3.6% on a minimum £3,600 investment.
However, all these offers involve locking up money through a lengthy period when rates are likely to rise. Five years from now, the return could look very poor indeed.
Equity ISAs, holding shares, bonds and managed funds are a puzzling prospect, so long as shares in London and globally reveal no clear trends. Nobody really knows if the global financial crisis has finished, or has only just begun.
Recent ISA investors have seen fortune favour the brave. Some wise - or lucky - investors who bought ISAs this time last year have seen the value of their holding surge 20-40%, depending on where they invested. Inside an ISA, this huge gain is tax-free.
Private client investment manager Brewin Dolphin says 'savvy' savers have been pouring cash into equity ISAs. Its clients have more than £151 million invested in equity ISAs today, against £86 million a year ago.
Rob Burgeman, Brewin Dolphin divisional director, says: "There has never been a better time to make the most of tax-free savings vehicles.
"ISAs offer the best of both worlds, with equity ISAs so popular due to the low interest rates which we are currently experiencing. Brewin Dolphin has seen more than a 40% increase in ISA subscriptions this year - reflecting the move from cash into equities.
"For over-50s, there is the added attraction of a rising ISA allowance as shares staged a global recovery."
Over-50s rushed to take advantage of raised limits for ISA allowances last autumn. The Investment Management Association (IMA) says a record £23.6 billion went into investment funds in the first 11 months of 2009, more than 10 times the figure for the same period of 2008.
Few investors have the confidence to put a single share into an equity ISA. Most of us choose funds, targeting sectors which look most promising, with emerging market countries such as the BRICs - Brazil, Russia, India, China - in fashion this year.
Patrick Connolly, at financial advisor AWD Chase de Vere, says: "Once you have adequate cash savings in ISAs, you should build an ISA portfolio with the right mix of shares, fixed interest and commercial property.
"Start with core funds such as Gartmore Cautious Managed (shares and fixed interest), Artemis Income (big companies paying good dividends), M&G Corporate Bonds (bonds issued by companies to raise funds) and M&G Property Portfolio (commercial property).
"As your portfolio grows, look to add global equity funds such as Cazenove European, JPMorgan US, First State Asia Pacific Leaders, and possibly JPM Emerging Markets."
Because many funds charge initial commission of perhaps 5% and more, it may be better not to invest direct.
Investors willing to choose their own funds do so through discount brokers, who absorb all, or nearly all, the initial charge - and may reduce annual management charges too - while providing no advice.
Brochures from discount brokers flood my desk at this time of the year, from firms such as Chelsea Financial Services, Killik & Co and Elson Associates.
Willis Owen lists more than 1,300 funds from 95 managers making no initial charge, while Financial Discount Direct (FDD) hones possible ISA choices down to 18 funds.
Paul Penny, of FDD, says: "Income is a priority for older clients, so funds holding corporate and strategic bonds are among our best sellers. The risk with bonds is what happens to capital values when rates and inflation rise."
At leading financial advisor Hargreaves Lansdown, Ben Lundie says clients hold nearly £15 billion in funds on its Vantage platform, just over £6 billion within ISA wrappers.
Hargreaves Lansdown honed down its choice of 2,500 funds to a Wealth 150 selection, with interest currently strong in equity income funds (chosen for higher dividends) and riskier funds like those in BRICs.
Lundie says: "Although share markets globally have been all over the place, investors are concerned about rising taxation and a possible change of Government.
"In many cases, investors put money within ISA wrappers ahead of April 5, intending to choose a fund later, possibly depending on how events unfold. This will be a fairly good ISA season."
The Share Centre selected 120 funds for a Platinum 120 range to simplify choice: One, M&G Global Basics, holds 40-80 companies typically for at least four years with Unilever, Tullow Oil and Lonmin among top five holdings.
Also in Platinum 120 is Investec Global Gold Fund, that is seeking long-term capital growth by holding shares in gold mining companies around the globe.
For fans of bricks and mortar, The Share Centre added Scottish Widows Partnership Property Trust to Platinum 120. With up to 30% in cash recently, it can move fast on buying opportunities.
Share Centre investors in a Platinum 120 fund pay no purchase commission on any fund, and no initial charge on almost 90% of funds listed.
:: Information: Hargreaves Lansdown (0117 980 9950 and www.H-L.co.uk); The Share Centre (0845 618 5218 and www.sharecom); TD Waterhouse Trading ISA (0800 531 6696 and online applications to isa.tdwaterhouse.co.uk); Brewin Dolphin (0845 213 2000 and www.brewindolphin.co.uk); AWD Chase de Vere (0845 140 4014 and awdchasedevere.co.uk).
Killik & Co (0207 337 0520 and www.killik.co.uk); Willis Owen (0800 597 2525 and www.willisowen.co.uk); Elson Associates (01732 433433 and www.elsonassociates.co.uk); Financial Discounts Direct (01420 549090 and www.financialdiscounts.co.); Chelsea Financial Services (0207 384 7300 and www.chelseafs.co.uk).
Special ISA offers from providers belonging to the Association of Investment Companies (AIC) available on 0800 085 8520 and at www.theaic.co.uk.
Poundnotes
:: Over 14 million Britons use credit cards to fund day to day purchases, says Moneysupermarket.com, and some might regret doing so as card rates hit a 12 year high.
A survey from Moneyfacts.co.uk says the current average credit card rate at 18.8% compares with base rate of 0.5%. When it was 18.7% back in February 1999, base rate was 6%.
Michelle Slade, at Moneyfacts.co.uk, says: "Borrowers with £5,000 debt on their card, who repay only the minimum each month, now repay an additional £2,289 over the life of the debt than they would have done in February 2006.
"Other charges such as balance transfer, cash withdrawal and foreign transfer fees also continue to rise, leaving customers paying more across the board."
Slade says that customers who previously switched to another card provider if they didn't like the charges are now likely to find it much harder to do so.
However, Andrew Hagger at Moneynet.co.uk says one card provider has cut its rate. Last April, SAGA cut the rate on its platinum card by 4% to 11.9% APR, while several others, including Virgin, HSBC, Santander, Smile and Post Office left rates unchanged.
He tips Barclaycard Platinum Simplicity (APR 7.8% for min income £20,000); Saga Platinum (11.9% for min £12,000 income, and at least 50 years of age) and Co-op Bank Clear VISA (12.9%, no minimum income restriction).
:: The news is mixed for investors in With Profits bonds, whose problems were discussed in last week's column. The bad news is that Legal & General has decided to freeze annual bonus rates for policyholders this year.
Andy Cowan, at financial advisor Towry Law, says: "Coupled with the poor tax qualities of life insurance products, it is clear insurance companies are no longer the best places to seek quality investment management and tax efficiency."
However, LV= (Liverpool Victoria) is promising a 28-day MVR-free 'window' this year when maturing bonds can be cashed in without a penalty. It will write to customers two weeks before they reach the maturity date to alert them.
:: Various fixed and capped price deals on energy bills expire in March 2010, warns comparison service uSwitch.com, so many of the 4.6 million households on these deals could see a big hike in energy bills.
Thomas Lyon, at uSwitch.com, says: "Many households are about to lose the protection of a fixed price energy plan.
"Fixed plans are right for some, but given the current potential for further price cuts, they could be wrong for many households. Online energy plans consistently offer the lowest prices, coming in around £300 cheaper than standard tariffs."
:: Small investors are piling into shares in the big High Street banks, says leading execution-only broker TDWaterhouse, with the top three buys this week led by Lloyds TSB, Barclays and Royal Bank of Scotland.
However, the top four sells listed by the broker also include the same three banks, so it could be that small shareholders are playing them as a short-term dabble.
Other popular buys in TD Waterhouse top 10 include miner Xstrata, BT, Provexis, Desire Petroleum, Aviva and Rio Tinto.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
State Bank of India 0207 454 4315 5.25% (F) New Hi Return Fixed Dep Five years £10,000 Yly
Saga 0845 850 0664 5.10% (F) Fixed Rate Savings £1 Yly
Secure Trust Bank 0800 408 2020 3.25% 120 Day Notice Issue 1 120 Days £1,000 Quarterly
FirstSave www.firstsave.co.uk 3.25% 90 Day Notice 90 Days £100 Yly
Stroud & Swindon BS 08457 252423 3.20% 50 day Notice 90 Day (S) £1,000 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC (Rem) 0800 494999 2.29% discounted for two years 60% £1,499 Yes
First Direct 0845 610 0100 2.39% variable for term 65% £999 Yes
ING Direct (UK) 0845 603 8888 2.89% for term 75% £695 Yes
Post Office 0800 707 6204 3.49% variable for term 80% £599 Yes
The One account 0845 610 1060 3.75% for term 75% none 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).
