Stocks and Shares ISAs offer best potential returns as Cash ISA rates fall

18 February 2009 / by Rachael Stiles
As the Bank of England continues to cut interest rates, now at just one per cent, and savings accounts follow suit, Fidelity International is asking if now is the time to switch from a Cash ISA to a Stocks and Shares ISA in search of better returns.

With ISA season in full swing as the end of the tax year approaches, Fidelity International is encouraging investors to make the most of their money, which is becoming increasingly difficult in the current climate.

Falling interest rates mean that savings accounts are being hit hard while mortgage customers enjoy lower monthly repayments.

The annual income from a typical Cash ISA has more than halved since the last ISA season, with the average Cash ISA rate falling to 2.1 per cent.

Consequently, the investment company suggests that investors might want to consider moving some or all of the money they have saved in Cash ISAs into Stocks and Shares ISAs, where it has the potential to reap higher rewards.

At the end of the last ISA season in April 2008, when the average Cash ISA was paying a rate of 4.8 per cent, around £142billion was held in Cash ISAs, generating an average annual income of £105.82. This has now fallen to just £46.20.

Since the new tax year, which brought with it new ISA rules, investors can now transfer some or all of their Cash ISA savings into a Stocks and Shares ISA, whereas before this was not allowed. Money saved in previous tax years can also be transferred retrospectively, without affecting the account holder's annual ISA allowance.

"Everyone needs to retain monies on deposit of course, but for people relying on interest to provide an income, cash is no longer offering attractive yields." explained Rob Fisher, head of UK personal investments at Fidelity International.

"When interest rates were high, investors in Cash ISAs could have received a relatively attractive income, tax-free, for little to no risk. Now, anyone who wants to maintain this level of income from their ISA investments will need to consider taking on a little more risk."

Those investors who opt to transfer money from cash to stocks and shares can choose from a variety of investments, he added, such as corporate bond funds and equity income funds, with different levels of risks so that the investor can limit their exposure.

Mr Fisher also reminded investors that "the jump from Cash to Stocks & Shares ISAs is significant", and urges them to "make sure that they understand exactly what they are putting their money into and the risks involved."

But, for those who want to maintain their level of income, he said, "this course of action may well be a solution to their problems."

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© Fair Investment Company Ltd