Money news, advice and predictions for savers and spenders. This week: why ISA-holders should keep their money where it is.
By Jeremy Gates
Traditionally, these weeks approaching the end of the tax year on April 5 see savers rushing to get money beyond the taxman's reach by investing in Individual Savings Accounts (ISAs) holding cash, shares or bonds.
Interest earned by Cash ISAs investments is taken tax-free, as are capital gains on ISAs holding shares. For the tax year ending April 5, the limit for a Cash ISA rises to £3,600, while a maximum £7,200 can go into a shares (equity) ISA.
By December 2008, more than £163m was held in Cash ISAs with banks, building societies and National Savings & Investments (NS&I). But this year's ISA season is looking a damp squib.
This is largely because savings rates have fallen so far. For example, NS&I's Cash ISA - accessible by phone, post, electronic transfer or standing order but no longer at Post Offices or by bank giro credit - pays a measly 0.90%.
The website Moneynet.co.uk reckons the average rate for Cash ISAs (including variable and fixed rate deals) with a £3,600 balance is 1.63%, while the average rate on variable rate savings accounts (£500 balance) is exactly 1%.
Why erect a tax shelter for these minimal levels of interest? No wonder ISAs risk dying of boredom.
It's hardly surprising if many people avoid equity ISAs this year, when prospects worldwide are so uncertain. But Cash ISAs might be more important than ever in a varied investment portfolio - when so many other investments are losing value.
When rates get back to anything like normal, Cash ISAs will look a pretty solid investment. Many people will need them to top up poorly-performing pensions in retirement.
Chancellor Alistair Darling might also try to revive ISAs in his Budget in April - to help savers who find themselves among the biggest victims of the credit crunch so far.
The personal finance website Unbiased.co.uk claims £165m is paid each year in tax by savers who fail to use a Cash ISA allowance and £98m is paid in tax unnecessarily by shareholders who fail to put shares into an ISA wrapper.
David Elms, chief executive of Unbiased.co.uk, says: "In the current environment when interest rates are low, it is important people don't pay unnecessary money to the taxman.
"Savers should make full use of their ISA allowance by April 5. Beyond that deadline, the 2008/9 allowance is lost forever".
It's a fair warning - but the message might be lost on 11.5m ISA investors, and others contemplating ISAs for the first time. Many savers, it seems, could dump ISAs altogether.
Price comparison site uSwitch.com claims 38% of ISA holders are ready to ditch their accounts - because the interest is so poor.
With an average cash balance of £2,200, these savers could withdraw a total £9.5bn - losing a possible £196m in tax-free interest had their ISA tax wrappers remained in place.
Rumina Hassam at uSwitch says: "Ditching one of the few friendly Government offerings may not be the best course of action for savers.
"Low rates will not last forever, and as soon as base rates climb again, savings rates will follow suit."
There is one other major argument for using Cash ISAs in 2008/9, which is easily overlooked in turbulent times.
UK Governments - Right or Left - will have to raise personal tax levels steeply in the next few years, to cope with huge debts built up by Government spending before and during the current crisis, and on rescues for banks, carmakers and other companies as recession deepens.
Andrew Hagger at Moneynet.co.uk says: "It's easy to see why savers are turning their backs on ISAs, but they shouldn't act in haste and withdraw money, especially if they have saved into ISAs since they began in April 1999."
Hagger says anybody saving the maximum allowed in ISAs since 1999 would have invested £33,600 by April 2009. That would earn £1041.60 a year in a Marks & Spencer Money Cash ISA paying 3.10%, saving £208.32 for basic rate taxpayers and £416.64 for the higher rate taxpayers.
An ISA paying 3%, says Andrew Hagger, is worth 3.75% to basic rate taxpayers and 5% for higher rate taxpayers.
When they select an ISA, savers must decide whether they want instant access - or are happy to lock up their money for long periods. Higher rates tend to be paid on bonds over a specific period, including Halifax paying 3.30% on four years, and 3.7% over three years.
Nationwide BS has a three year fix at 3.5%, on a minimum £1 deposit, and a two year option at 3.3%.
Andrew Hagger at Moneynet.co.uk says: "When you look at Cash ISA tax free returns over one year, it is not much different to Fixed Rate Bonds where interest is taxed. But if we assume rates will eventually recover, four years might be too long to lock in around 3%".
Higher Cash ISA rates usually come with strings attached. Saffron BS, a regional society serving East Anglia, offers 7%, with a £25 minimum deposit and maximum monthly saving of £300.
Saffron's other Cash ISAs are a one year fixed rate at 2.50%, and a two year fix at 3.30%.
First Direct also has a 7% Cash ISA for regular savers - if they also take out a current account and pay into it at least £1,500 per month.
ICICI Bank, fully protected by Government guarantee up to £50,000 per saver, has a one year fixed rate at 3.90%, on minimum £1,000 deposits, while Leeds BS offers a 3% fix for savers accepting a tie-in until 2014.
Norwich & Peterborough BS offers a 3.30% - if the full £3,600 is paid in to open an account.
Among variable rate deals, better payers include M&S Money at 3.10% (min deposit £100), Egg at 3.05% (minimum £1) and Yorkshire BS internet account (3.25% on minimum £1).
If the rate on your Cash ISA falls behind the market, you can switch accounts to a new provider. But not all providers accept transfers in.
When the finance website Moneyfacts.co.uk assessed the most consistent Cash ISA accounts over 36 months, its league leaders included: Kent Reliance BS Direct; Tipton & Coseley BS Premier; Yorkshire BS e-ISA; Earl Shilton BS 90 Day; Monmouthshire BS; and Leek United BS.
These second division building societies - all keenly competitive - may be the best place to find a good Cash ISAs. With them, you could be sitting pretty if, as expected, the Bank of England's MPC cuts yet again in February/March.
:: INFORMATION: www.Moneynet.co.uk; www.Moneyfacts.co.uk; uSwitch.com (0800 093 0607); www.Unbiased.co.uk; NS&I (0845 964 500).
Hargreaves Lansdown (0117 900 9000) is among discount brokers which can hold investors' money in cash, provided it is allocated by April 5, for subsequent investment into an ISA, cash or otherwise, when the investment picture is clearer. Hargreaves Lansdown has five cash funds on its ISA list, including Aberdeen, Legal & General, Henderson, Royal London and M&G
POUNDNOTES
:: Pain for savers is hardly bliss for homebuyers, says Michelle Slade at Moneyfacts.co.uk who claims the last 0.50% cut in Bank of England base rate has had minimal impact on mortgage rates.
Many lenders are "actively trying to discourage borrowers using Standard Variable Rate mortgages as a product option", says Slade, while the margin taken by lenders on tracker mortgages has "continued to widen and currently stands at three times base rate.
"Fixed rate mortgages are not faring much better with pricing more than double the cost of funding on the swap rate market", says Michelle Slade.
"Lenders will only pass on cuts to a level they are happy to lend at, and for most this seems to have been reached", she concludes.
:: A rare piece of good news on private pensions: although most employees leave final salary pension benefits with a previous employer, some workers move their pension to retain greater control, says Laith Khalaf at financial advisor Hargreaves Lansdown.
In these cases, transfer values quoted for pensions moved to another pot have jumped since July 2008, in one case by 85% - possibly because of new regulations for calculating transfer values imposed by the Department of Work and Pensions (DWP) in October.
Low gilt yields may be another contributory factor.
"These increased transfer values are as welcome as they are unexpected", says Khalaf. However, he says that leaving final salary pensions where they are is usually the safer bet.
In some cases, says Khalaf, workers who previously decided against moving final salary pension pots might seek a new transfer value - even if they have to pay for it.
Laith Khalaf says employees move pension pots for various reasons: some want retirement funds in their own hands, even if it means losing guarantees from a previous employer, while others don't want some extras which final salary pensions offer. For instance, provisions to pay to a surviving spouse are not needed by single workers.
:: Despite the doom and gloom, the number of 'demi millionaires' in Britain - with investible assets of £500,000 and more - will rise from 571,000 today to 936,200 by 2016, says a report by Professor Merlin Stone and commissioned by WhiteConcierge.
Professor Stone says one result of the current crisis is that banks will charge for accounts currently offered free.
The trend is already happening: in March 2008, there were 33 current accounts with overdrafts charging monthly or quarterly fees, and this had risen to 40 by December 2008.
He thinks the number of households in Britain with financial wealth of £349,000 or more (excluding the value of their home) could rise by 207,400 between 2006 and 2016.
:: At least, investors in global corporate bond funds have had something to smile about in the past year, says Tony Aherne, director of Moneyspider.com, which monitors around 2,000 funds for UK investors and provides online personal reports updated on a daily basis showing current valuation and performance of all funds in one place.
Moneyspider says the Scottish Widows Global Bond Plus, which topped its performance tables, turning £7,000 into £11,095 in the year to January 15, while M&G's International Sovereign Bond Fund also rose sharply by 46%, turning £7,000 into £10,278.
Can global bond funds keep up their good run?
Tony Aherne says: "While volatility will continue for the next couple of quarters, this is something that global bond managers will be able to capitalise on as they will be able to access distressed assets, for example.
"As returns from ordinary savings products are slashed to next to nothing, our view is that 2009 will see a major drift towards lower risk bond funds; anywhere that money is actually making money has to be attractive."
www.moneyspider.com enquiries : 01784 264 220.
