2014 Cash ISA Selections
With time running out to meet the 5th April end of tax year deadline, we bring you our selection of the best Cash ISAs available.
Our ISA season instant access selection is from Scottish Widows Bank, which is offering 1.00% AER on their E-Cash ISA. You do not have to be an existing customer to obtain this rate nor open any other type of account as a condition. You can make unlimited withdrawals – without notice or loss of interest – and the account accepts Cash ISA transfers. The minimum to open the account is reasonably low at £1,000 and there is choice of biannual or annual interest.
In the shorter term you can get 1.60% with the 1 Year Fixed Rate Bond from Aldermore or 1.80% AER for a 2 Year Fixed Rate Bond, again from Aldermore. Both accounts have a minimum of £1,000, accept transfers in from existing Cash ISAs and can be managed online, by phone or by post.
With the approach of the end of the tax year, banks and building societies traditionally launch new accounts to attract savers but there has been a noticeable lack of new accounts this year. This has particularly effected the fixed rate market resulting in there being very little on offer in the way of longer term fixed rate Cash ISAs.
Concerned about interest rates and inflation?
Many of those considering traditional savings plans are likely to be considering instant access or a one or two year fixed rate bond, especially considering the lack of competitive longer term deals. However, although the above rates are competitive, remember that with inflation running at 1.9%, even though you do not pay any tax on your interest they are still falling short. If inflation should move up from its current levels during your fixed rate period, the impact will be even greater.
When unveiling its quarterly inflation report last month (Feb 2014) the Bank of England stated that interest rates will remain at their record low ‘for some time to come’ with the base rate potentially rising to 2% by 2017. The Bank added that interest rates will probably never reach pre-recession levels of around 5% even after the economy fully recovers, commenting that the ‘new normal’ was likely to be 2% to 3%. Since there is also no guarantee that any rate increase will be passed on to the savings rates on offer, perhaps you should indeed be concerned about the rate you are receiving and the impact inflation could have on your savings.
Cash ISA alternatives help to bridge the gap
This environment has put increasing pressure on savers to look even closer at where they put their money, and think about how hard it is working for them with many considering alternatives to the more traditional fixed rate bond. Structured deposits have flourished in this environment, as some savers begin to see their over-reliance on fixed rate bonds has resulted in the real value of their savings being eroded at a time when they need it most.
These plans link your return to the future performance of the stock market, normally the FTSE 100 Index or a number of shares within the Index, offering the potential to achieve higher returns than would be available from a fixed rate bond of similar duration, as well as the opportunity to beat inflation over time. Unlike fixed rates, the returns available are not guaranteed, so if the index or shares do not perform as required, you would only receive a return of your initial deposit. FSCS protection is available up to the normal deposit limits. Arrangement fees apply to all of these plans.
For those looking for an annual income, the Target Income Plan from Investec Bank will make a 4.85% (gross) payment provided the FTSE is above 90% of its value at the start of the plan at the end of each year (subject to averaging). If it is equal to or below 90%, no income payment will be paid for that year. The plan also includes a unique memory feature which means that should the value of the FTSE meet the required level on a future anniversary, any missed income payments will be added back.
The maximum fixed rate Cash ISA over 5 or 6 years is currently offering around 3% AER and so this plan could be an attractive alternative for those prepared to sacrifice a guaranteed return in the hunt for higher potential returns.
Plans that can mature from year 2 onwards
Plans which have the ability to mature early are often referred to as ‘kick out’ plans. Although they have a maximum term of five or six years, they also have the potential to mature at the end of each year, normally from year 2 onwards.
The Kick Out Deposit plan from Investec will mature at the end of each year from year 2 onwards, provided the value of the FTSE 100 Index is higher than its value at the start of the plan (subject to averaging), even if this is by just a single point. If it is, the plan will end and provide a return of 4.25% for each year (not compounded) – that’s a potential 8.5% in just 2 years. If the Index is lower on all of these dates, you will only receive a return of your initial deposit at the end of the six year term.
For those prepared to link their return to the performance of five FTSE 100 shares rather than the Index itself, Gilliat’s Deposit Kick Out offers even higher potential returns. The value of each share is taken at the start of the plan and if all five shares are at or above these levels at the end of each year (from year 2 onwards), you will receive your original capital back plus a 7.5% annual return (not compounded).
In the final year if all five shares are at least 90% of their starting value then the plan will pay out a fixed return of 45%, but if one or more of the shares are lower at the end of every year, you will not receive any growth and only your capital back. Capital protection is provided by Lloyds Bank plc.
Market leading three year fixed rate Cash ISAs that accept transfers in are offering 2.25% while the 3 Year Deposit Plan from Investec offers an alternative for your savings with a potential 12% return after three years provided the FTSE 100 finishes higher than its starting value (subject to averaging), even if this is only by a small amount. The upside is that the potential return equates to around 3.23% per year compound after charges – a premium of almost 1% on leading fixed rate Cash ISAs. The downside is the rate is not fixed and if the FTSE is lower, you only get your initial capital back.
For those able to commit for the longer term, the UK Super Tracker Deposit Plan from Societe Generale offers a return of 4.05 times any growth in the FTSE over the term of the plan, subject to a maximum growth return of 40.5% (and your capital back). Therefore, if the FTSE rises by at least 10% over the term you will receive the maximum return of 40.5%. This equates to around 5.8% compound annual growth which is almost double the return from leading longer term fixed rates. However, the return is not guaranteed and if the FTSE only rises by a small amount or falls, you may have been better off with a fixed rate.
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 with inflation continuing to threaten our net returns, structured deposits have risen in popularity. They can offer a viable alternative and are becoming a worthy complement to the more traditional fixed rate savings options.
With the prospect of the prevailing 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. Cash ISAs provide tax efficient income and growth, the value and benefit of which is compounded over time. Please note that tax treatment depends on legislation and your individual circumstances which may change in the future.
Dual tax year – act now
All of the structured deposit plans detailed above are available as a new 2013/14 Cash ISA and will accept Cash ISA transfers. Most also allow you to take out your Cash ISA for the next tax year (2014/15, allowance of £5,940) at the same time as the current tax year. Application deadlines apply.
Summary of our 2014 Cash ISA selections
Instant access paying 1% AER variable, Scottish Widows E-Cash ISA »
1 year fixed rate paying 1.60% AER, Aldermore 1 Year Fixed Rate Bond »
2 year fixed rate paying 1.80% AER, Aldermore 2 Year Fixed Rate Bond »
Potential for 4.85% income, Investec Target Income Deposit Plan »
Potential 8.5% in 2 years, Investec Kick out Deposit Plan »
Potential 15% in 2 years, Gilliat Deposit Kick Out »
Potential 12% in 3 years, Investec 3 Year Deposit Plan »
4.05% any rise in the FTSE, capped at 40.5%, SocGen UK SuperTracker »
AER – Stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
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 you should seek independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
Some of these plans 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 is not a guide to its future performance.