Don't waste your ISA allowance, invest in bonds and income funds to spread the risk, says Virgin Money

01 April 2009 / by Rebecca Sargent
Savers disheartened by falling interest rates and returns on their investments should not be put off using their ISA allowance altogether, but should spread the risk between bonds and income funds, Virgin Money has suggested.

Meagre returns as a result of record low interest rates on cash ISAs, and ongoing volatility in the stock market have combined to discourage millions from investing in an ISA at all before the end of the 2008/2009 tax year this week.

Cash ISA rates hit an average 0.96 per cent at the end of February, according to Bank of England figures, which has caused an exodus of savers investing in cash to stocks and shares ISA instead.

Virgin Money believes that savers can beat the low rates without losing out and wasting their £7,200 ISA allowance, if they choose a mixture of bonds and income funds, spreading the risk between cash ISAs and investment ISAs.

In contrast to patterns seen across other parts of the savings and investment market, Virgin Money has found that its Bond and Gilt fund performed better than the Strategic Bond Sector by more than 1,100 basis points between March 2008 and March 2009, with investors seeing an income from the Fund whilst being protected from the worst of the problems in the stock market.

"Looking for silver linings among the clouds over savings and investment markets at the moment is extremely time-consuming and potentially very risky. However the end of the tax year and the offer of the ISA allowance

is an opportunity to focus on long-term saving no matter what the current conditions," said Grant Batherm, spokesperson for Virgin Money.

"Income funds are a good way to ensure you use your ISA limit and don't lose it, without putting your money at too much risk. They offer the prospect of income which beats cash ISAs and protection from the worst of the equity swings and roundabouts."

Virgin Money's most recent Investor Intentions Index shows that bonds are the only sector where investors are exhibiting confidence amid current market conditions.

The research also revealed that independent financial advisors are encouraging their clients to choose bonds, with more IFAs recommending that they do so in the last three months than when the index began last year, and Virgin Money expects more to urge savers to choose bonds in the coming months.

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