The lack of competitive rates available in the savings market is hitting Cash ISA savers just as much as anyone else and with the prospect of this continuing well into the next tax year, now is the time to consider all of your options carefully. With some Cash ISAs offering the potential for as much as 7% income each year and growth plans with uncapped returns, we take a look at where the Cash ISA focus is shifting to.
Cash ISA savers hit hard
Cash ISA savers have been hit hard by the current economic environment since not only have they had to deal with this continuous period of record low interest rates, but they are rarely offered any notification by their existing bank or building society of new accounts.
Should a newer version of their account get released with a better rate, there is nothing stopping a customer moving to the newer version but the bank will not automatically do it for you and rarely do they notify you. In addition, many accounts that used to offer competitive rates are now closed to new customers and once closed the interest rate can drop dramatically.
Beating inflation should be a key priority
Inflation is another area which is also having an impact on Cash ISA savers. Consumer inflation is currently running at 2.7% whilst the Retail Prices Index rose to 3.1% during December. These levels are way above the 2% target the Bank of England has been set and it is vital to remember that inflation can erode the spending power of your savings by significant margins over time.
Despite the Cash ISA benefit of receive income or growth which is not then liable to tax, you still need to receive more than the prevailing rate of price increases to keep up and with the potential for significant inflationary pressures to rear their ugly head in the coming years, making sure your money is working as hard as possible should be a top priority, especially over the medium to longer term.
Market lows squeeze opportunities
Unfortunately and even more discouraging for savers is the current lack of competitive deals across both variable and fixed rate Cash ISAs, regardless of how long you are prepared to commit your savings for. Gone are the days where committing your money for longer was all you needed to do in order to secure a higher rate.
Banks and Building Societies are littered with accounts paying as little as 0.05%. Even at the more competitive end there is nothing paying much over 3% in the fixed rate space and even lower rates are available on the shorter terms and variable rates. Even worse, many of these rates are only available to those with £40,000 or £50,000 already in their Cash ISAs to transfer.
No time to waste
Although we still have a few months left before the end of the tax year to make use of our Cash ISA allowance, we also know just how quickly the weeks and months can pass us by.
Since our ISA allowance is lost should we fail to use it during the tax year, the combination of continued low interest rates and a status quo of the paltry offerings from banks demands our immediate attention.
Transfers, transfers, transfers
This bleak outlook is even more important to understand in the context of transfers. For those savers who have more than one year’s Cash ISA allowance put aside the impact is even greater with each day that passes potentially reducing the spending power of your hard earned savings.
These ever increasing pressures brought about by the current market conditions are putting more and more pressure on savers to take a long hard look at how they split their money and has resulted in the rapid growth of alternatives to the more traditional fixed rate bond.
Structured deposits bridge the gap
Times have changed. The main reason for the shift of focus towards structured deposits has been the over-reliance of fixed rate bonds by savers who are now seeing the real value of their savings eroded at a time when they need it most.
Structured deposits have flourished in this environment by combining full protection of your capital with a potential upside. By linking your return to the future performance of an Index, normally the FTSE 100, these plans offer savers the opportunity to achieve higher returns that would be available from a fixed rate bond of similar duration. This potential return is balanced against the index not performing as required in which case you would only receive a return of your initial deposit, with FSCS protection available up to the normal deposit limits.
Income Cash ISA selections
For those looking for income, Societe Generale’s UK Range 7 Plan offers the opportunity for an attractive 7% (gross) for each year the FTSE stays between an upper and lower range based on its level at the start of the plan. The range increases each year, starting at +/- 12% in year 1, ending at a range of +/- 25% in the final year thereby providing a wider range each year within which the FTSE can move. If it moves outside of the range, the income is not paid for that year. The maximum fixed rate over 5 or 6 years is currently offering little more than 3% and so this plan is proving particularly popular.
Alternatively, the Target Income Plan from Investec will make a 4.5% (gross) payment provided the FTSE is above 90% of its value at the start of the plan at the end of each anniversary (subject to averaging). If it is equal to or below 90%, the income will not be paid for that year however any missed payments will be added to any future payments should the FTSE return to being above 90% of its starting value on any of the subsequent anniversaries.
Growth Cash ISA selections
Investec’s 3 Year Deposit Plan offers a fixed return of 15% (gross) if the value of the FTSE at the end of the term is higher than its starting value, subject to averaging. This equates to around 4.31% compound and compared to our current leading 3 year fixed rate, offers the potential for a 1.36% annual premium.
The Growth Deposit Bond from Legal & General also links your return to the FTSE by offering 115% of any rise in the Index over the six year term but capped at 40%, which equates to a maximum potential return of 5.7% a year compound. For those who do not want a cap on any potential returns and prefer a 5 year timeframe rather than 6 years, Investec’s Deposit Growth Plan will return any rise in the FTSE over the term of the plan (subject to averaging) without any upper limit.
The downside to these last two plans is that if the FTSE only goes up by a small amount or goes down over the term, a fixed rate may have paid a higher return. They are therefore designed for those who expect the FTSE to rise in the future, catering for 3, 5 and 6 year timeframes.
Make the most of this valuable tax break
With the current market for both variable and fixed rate Cash ISAs offering very little by historical standards and inflation continuing to threaten our net returns, structured deposits have risen in popularity by offering a viable alternative and a strong compliment to the more traditional fixed rate savings options.
With the prospect of this economic situation continuing for some time, now is the time to make sure you consider all of your options carefully so that you maximise the returns from this valuable tax break.
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No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.
These are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
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