ISA season selections – Cash ISAs
ISA season is an important time of year as we start to consider all of the options available in order to make the best use of this valuable tax break. Although traditionally this is the time when savings rates start to pick up, competition among banks to offer competitive fixed rates remains at an all time low so it is more important than ever to think carefully before taking action. We therefore bring you our selections of the best Cash ISAs the market currently has to offer. For those prepared to put their capital at risk in the hunt for higher returns, we have also put together our Investment ISA season selections.
Below we have listed some of our most popular Cash ISA plans currently available. To help you further, we have split these into user friendly categories and where appropriate, divided them into term since the combination of the return available and the length of time your money is tied up are often the most important factors when deciding which option to take.
Remember, Cash ISAs can now be transferred to Stocks & Shares ISAs which opens up another option for savers who are having to face the impact of record low savings rates. Please note though that once you transfer a Cash ISA to a Stocks & Shares ISA you cannot then move it back into a Cash ISA in the future. Click here to review our Investment ISA season selections >>
Cash ISA savers have been hit hard by the prevailing economic conditions since not only have we had to deal with this continuous period of record low interest rates, but banks are not as desperate for our money as they used to be and so the savings rates on offer are very low. Add to this the ongoing threat of inflation on our overall returns and one can quickly see how losing money in real terms is increasingly becoming the norm. Needless to say the importance of the ISA continues to rise.
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 1.00% 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 1.50% AER. This rate is eligible on balances of more than £1,000 and includes a fixed introductory bonus of 1% AER which is paid until 31st January 2015, 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.
Compare instant access Cash ISAs >>
With the headline rate of inflation currently running at 1.9%, the only way to beat it is to tie yourself in for longer. However, the medium to longer term fixed rate market is uncompetitive at present, certainly by historical standards, with nothing over 3% available. This means the uplift for committing your money for longer can be difficult to justify, especially when you take into account the potential impact of rising inflation which was 2.9% as recently as July last year. This has lead many savers to opt for instant access deals instead but unfortunately, as the above rates show, the only guarantee here is that your capital is losing money in real terms.
In the shorter term, the Aldermore 1 Year Fixed Rate Cash ISA is offering 1.60% AER whilst their 2 Year Fixed Rate Cash ISA pays 1.80% AER. Both accept transfers in and have a minimum opening balance of £1,000 and partial withdrawals are allowed although these will be subject to a deduction of interest.
Compare fixed rate Cash ISAs >>
Savings rates fail to deliver
To put the above rates into perspective, the equivalent leading instant access deal last year was offering 2.25% AER while if we go back a couple of years, 3.00% AER was available instant access and as much as 4.00% AER fixed if you could tie in for a mere 18 months. Therefore, for all of those with fixed rates maturing or introductory bonuses coming to an end, many 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.
The potential for higher returns
These accounts combine full protection of your capital with a potential upside and by linking your return to the future performance of shares or an Index (normally the FTSE 100), these 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 underlying investment failing to perform 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. Arrangement fees apply to all of these plans.
Income Cash ISAs
For those looking for an annual income, the Target Income Deposit 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 3% AER and so this plan is proving extremely popular.
Growth Cash ISAs
Market leading three year fixed rate Cash ISAs that accept transfers in are offering 2.40% 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 single point. The upside is that the potential return equates to around 3.20% per year compound after charges – a healthy premium on leading fixed rates. 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 4.15 times any growth in the FTSE over the term of the plan, subject to a maximum growth return of 41.5% plus a return of your capital. Therefore, if the FTSE rises by at least 10% over the term you will receive the maximum return of 41.5%. This equates to just under 6% 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.
Plans that can mature early
For those prepared to tie in for the longer term but who would also like the opportunity for their plan to mature early, the Kick Out Deposit plan from Investec offers the potential to mature from year 2 onwards. Provided the value of the FTSE 100 Index at the end 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, then the plan will mature early and provide a return of 4.25% for each year (not compounded) – that’s a potential 9% 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.
The potential for 15% in 2 years
Finally, for those prepared to link their return to the performance of five FTSE 100 shares rather than the FTSE 100 Index itself, the Deposit Kick Out Plan from Gilliat 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 their starting 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.
Compare Cash ISA selections >>
Fixed income investment alternative
Since the need for income remains one of the most consistent demands put on our capital, the failure of fixed rate bonds to provide attractive returns has lead to an increasing number of savers transferring their Cash ISAs to Investment ISAs in an attempt to try and counter the challenges they face by giving up the security of cash for potentially better returns. For those prepared to put their capital at risk in order to provide a higher fixed income the Enhanced Income Plan from Investec offers 6.00% fixed each year, paid to you regardless of the performance of the stock market. This is paid in monthly installments of 0.50% so you know exactly how much you will receive, when and for how long.
The trade off for a fixed income which is well over double the rate of inflation and significantly higher than any return available from fixed rate bonds is that your capital is at risk. This investment contains what is known as conditional capital protection which means that your initial investment will be returned in full unless the FTSE 100 Index falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall. Therefore, this plan should only be considered if you are prepared to lose some or all of your capital.
Click here for further information on the Investec Enhanced Income Plan >>
Cash ISA transfer option
Transferring your Cash ISA can be done without the loss of your ISA wrapper and it will not affect your annual ISA allowance for the current tax year. However, if you are considering this option you should be aware that Cash ISAs and Investment ISAs are different and that Investment ISAs such as the Investec Enhanced Income Plan put your capital at risk. Also note that once you have transferred to an Investment ISA you cannot transfer back to a Cash ISA. Please also check with your existing ISA provider whether any charges apply on transferring.
Important reminder – why do an ISA?
One of the main reasons for using an ISA concerns the tax treatment since no tax is payable on the income you receive or on any capital gains that you make and there is no need to declare any ISA income or capital gains on your tax return. They therefore provide tax efficient income or growth on your deposit or investment, the benefit of which can be compounded over time. Please note that the tax efficiency of ISAs is based on current tax law which is subject to change in the future.
For help and guidance at this important time of year, 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.
Compare Cash ISA alternatives to fixed rate bonds >>
Compare Cash ISA transfer options >>
Compare Investment ISA transfer options >>
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. Tax treatment depends on your individual circumstances and may change and may be subject to change in the future.
AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
Although structured deposit plans 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. Returns are not guaranteed. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
The Investec Enhanced Income Plan is a structured investment plan that is 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) for default alone. In addition, you may not get back the full amount invested if the plan is not held for the full term.