With the ISA season well and truly underway, now is the time to consider all of the options available. The current economic environment gives both savers and investors some very real challenges. To help, we offer you a detailed round up of our selection of the best the market has to offer, for both Cash ISAs and Investment ISAs, as well as ISA transfers.
Below we have listed some of the most popular ISA plans currently available. To help you further, we have split these into user-friendly categories and where appropriate, classified them by timescale. We have done so because the combination of the return available and the length of time your money is tied up are two of the most important factors to consider when deciding which option to take.
Cash ISA savers have been hit hard by the current economic environment since not only have they had to deal with a continuous period of record low interest rates, but banks are not as desperate for your money as they used to be. This means that the rates on offer are very low. On top of this, there is the threat of inflation to deal with, which is having a real impact on overall returns.
Instant access – no bonus
The pick of the instant access accounts which do not include a bonus in the headline rate, is the E-Cash ISA from Scottish Widows Bank, paying 1.80% AER. Part of the Lloyds Banking Group, the minimum deposit is only £10, transfers are accepted, and there is no notice period or loss of interest for withdrawals.
Instant access – with bonus
For those who are happy to revert to a variable rate at a later date, the Web ISA from Nationwide is currently offering 2.25% AER. This rate is eligible on balances of more than £10,000 and includes an introductory fixed bonus of 1.75% AER which is paid until 31st August 2014, after which the rate reverts to 0.50% AER variable so you will need to consider your options again at this time. You also need to hold or open a Nationwide card account to apply.
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In the shorter term, the RBS 1 Year Fixed Rate Cash ISA is offering 2.05% AER while their 2 Year Fixed Rate Cash ISA pays 2.35% AER. Both accept transfers in, and have a minimum deposit of £1,000. However, partial withdrawals are not allowed and early closure will result in an interest charge.
The medium to longer term fixed rate market is rather uncompetitive at present, and so the uplift in return for committing your money for longer is barely worthwhile, especially when you take into account the threat of inflation.
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Higher potential returns
To put the above rates into perspective, the equivalent leading deals last year were offering 3.0% AER for an instant access ISA and 3.35% for a one year fixed ISA. Those with fixed rates maturing now or introductory bonuses coming to an end, are facing a significant drop in the equivalent interest rate on offer. This has highlighted the over-reliance on fixed rates by many savers, who are now seeing the real value of their savings eroded by inflation at a time when they need it most. The prospect of these low savings rates continuing well into the future is leading many to carefully consider the wider range of options available, in particular structured deposits.
These accounts combine full protection of your capital with a potential upside by linking your return to the future performance of an Index, normally the FTSE 100 Index. This offers 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. These plans are also eligible for the Financial Services Compensation Scheme up to the normal deposit limits.
Income Cash ISAs
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 the range, the income is not paid for that year. The maximum fixed rate over 5 or 6 years is currently offering well below 3% AER, so this plan is proving extremely popular.
Alternatively, the Target Income Plan from Investec will make a 4.65% (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 above 90% of its starting value on any of the subsequent anniversaries.
Growth Cash ISAs
Investec’s 3 Year Deposit plan offers a fixed return of 14% (gross) if the value of the FTSE at the end of the term is higher than its starting value, subject to averaging, whilst Investec’s Kick Out Deposit plan offers a potential 4.50% per year (gross, not compounded) and will mature early or ‘kick out’ provided the value of the FTSE 100 at the ends of years 2, 3, 4 or 5 is higher than its value at the start of the plan (subject to averaging) – even by just one point.
The Growth Deposit Bond from Legal & General also links your return to the FTSE by offering 115% of any rise in the FTSE over the six year term. This is capped at 40%, which equates to a maximum potential return of 5.7% a year (compound). For those who don't want a cap on any potential returns and prefer a 5 year timeframe, Investec’s Deposit Growth Plan will return 130% any rise in the FTSE over the term of the plan (gross, 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.
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The Enhanced Income Plan from Investec has been our most popular investment, offering a fixed income which is paid to you each month, regardless of the performance of the FTSE 100 Index. The annual income is currently 6%, which equates to 0.5% paid each month. Your capital is at risk if the FTSE drops by more than 50% during the plan.
High yields are also available from investment funds, but unlike the Investec plan, these returns are not fixed. Invesco Perpetual’s Monthly Income Plus fund has a current distribution yield of 6.17%* and pays income each month while Newton’s Higher Income fund has a historical yield of 5.54%* and pays quarterly. For a managed fund option, Invesco Perpetual’s Distribution fund has a distribution yield of 5.53%* and pays income monthly.
All of these funds have a 0% initial charge when invested through the Fair Investment Fund Supermarket, and you can also transfer your existing funds at no charge.
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For those looking for Investment ISAs offering a defined return, the most popular type of growth investment is the Kick Out plan, which offers the opportunity to mature early from year one onwards. The highest rate available is through Investec’s Enhanced Kick Out Plan, which will return 9% per year (not compounded) should the FTSE finish higher at the end of the year than its starting value. Therefore, the FTSE only has to go up a little in order for the plan to mature early. Your capital is at risk if the FTSE falls by more than 50% during the investment term, which is 5 years.
RBS have a similar plan offering 8.5% but with a six year term whilst for those looking for a defensive option, Morgan Stanley’s FTSE Defensive Bonus Plan offers the potential for 7.25% each year (not compounded) provided the level of the FTSE at the end of each year (from year 2 onwards) is at or above 95% of its starting value.
Other popular fixed term investments include Investec’s Defined Returns Plan, which offers a fixed return of 40.5% at the end of year 3, or 67.50% at the end of year 5, if on either date the value of the FTSE is higher than its value at the start of the plan (subject to averaging). With all of these plans, your capital is at risk is the FTSE falls by more than 50% during the investment.
For those looking for investment fund growth options, the Fair Investment Fund Supermarket has over 1,500 funds from over 90 investment managers. Current highlights include Schroder’s UK Alpha Plus fund, which focuses on UK equities and has a Gold rating from OBSR*. Our global equity pick is M&G’s Global Basics fund which also has a Gold rating from OBSR*.
Fair Investment also provide you with our most popular choices and fund selections across a number of other sectors, including Emerging Market funds, Ethical funds, Managed funds, Bond funds and Absolute Return. Our current selection includes First State’s Global Emerging Markets Leaders fund which is top quartile over 1, 3 and 5 years, and is AAA rated by Citywire*.
All of the funds detailed above have a 0% initial charge when invested through the Fair Investment Fund Supermarket, and you can also transfer your existing holdings at no charge.
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Important Reminder - why use an ISA?
The main reason for using an ISA relates to the tax advantages, since no tax is payable on the income you receive or on any capital gains that you make. There is no need to declare any ISA income or capital gains on your tax return. ISAs therefore provide tax efficient deposit or investment growth, the value of which is compounded over time.
For help and guidance at this important time of year, please see our Top 10 Tips for ISA season. Please also note that with all of these options, our experienced Investment Customer Services team is always on hand to answer any questions you may have.
* data correct as at 31/01/2013
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.
Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
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