2013 Cash ISA Selection
19 March 2013 / by Oliver Roylance-Smith
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 1.80% AER on the E-Cash ISA. You do not have to be an existing customer to obtain this rate, and there is no introductory bonus, which means you don’t have to worry about your rate dropping off a cliff in 12 months’ time. You can make unlimited withdrawals – without notice or loss of interest – and the account accepts transfers. The minimum to open the account is a respectable £1,000 and there are monthly, quarterly and annual interest options.
Traditional fixed rates
In the shorter term you can get 2.0% AER for a one year fixed rate from RBS or NatWest or 2.25% AER in return for fixing for 2 years, again from both RBS and NatWest. All of these accounts have a minimum of £1,000 and accept transfers in from existing Cash ISAs.
There’s very little on offer in the way of 3-5 year fixed rate bonds at the moment. Even at the more competitive end, you will struggle to beat the 3% mark, barely keeping up with inflation.
Alternatives help to bridge the gap
Savers are under increasing pressure to re-evaluate where they put their money, and think about how hard it is working for them. Many savers are now 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 or several FTSE 100 shares, 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 try and beat inflation. 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, with FSCS protection available up to the normal deposit limits.
High yield potential
The plan with the highest potential yield currently on offer is the Money Builder Deposit Plan from Societe Generale. Whether you receive your income or not each year is dependent on the performance of five FTSE 100 companies rather than the FTSE 100 Index itself. If the value of all five shares at the end of each year is at or above 95% of their values at the start of the plan, you will receive an 8% income payment. If one or more are lower, you will not receive any income.
Other income plans
Based on the performance of the FTSE 100 rather than five shares, the Target Income Plan from Investec will make a 4.65% (gross) payment provided the Index 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 being above 90% of its starting value on any of the subsequent anniversaries. An arrangement fee applies to this plan.
Alternatively, a 4.0% (gross) income payment is on offer from Legal & General’s 6 Year Annual Bonus Deposit Bond. This is also dependent on the FSTE 100 and is paid out each year, provided the Index ends at the same level or above its value at the start of the plan.
Plans that can mature as early as year 2
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, often as early as year 2 onwards.
The Defensive Kick Out Deposit Plan from Societe Generale offers the potential to mature from year 2 onwards. Your return is based on the performance of five FTSE 100 companies. If all five shares are at or above their starting levels at the end of years 2, 3, 4 or 5, the plan will mature early and you will receive 6% for each year (not compounded) – that’s a potential 12% return after just 2 years. In the final year the share values need to be at least 90% of their initial value, in which case you would receive 36%. If the value of the shares is lower on all of these dates you will only receive a return of initial deposit.
Investec’s Kick Out Deposit Plan can also mature early, offering a return of 4.5% times the number of years the plan has been in place (not compounded). The plan has a maximum five year term but will ‘kick out’ from year 2 onwards provided the FTSE 100 Index finishes higher than its starting value – that’s a potential 9% after just 2 years. If the FTSE is lower on all of these dates you will only receive a return of initial deposit.
Although these plans can mature as early as year 2, there is no guarantee that this will happen and they should only be considered if you are able to commit your capital for the maximum potential term.
However, Investec Bank does offer a 3 Year Deposit Plan which will return 14% (gross) at the end of the three year term provided the FTSE finishes higher than its value at the start (subject to averaging). This equates to around 4.45% compound and compared to current market leading 3 year fixed rate Cash ISA, offers the potential for an extra 1.45% per year.
Other growth plans
The Growth Deposit Bond from Legal & General also links your return to the FTSE by offering 150% of any rise in the Index over the six year term (subject to averaging) but capped at 40%, which equates to a maximum potential return of 5.75% a year (compounded). For those who do not want a cap on any potential returns and would prefer a 5 year rather than a 6 year timeframe, Investec’s Deposit Growth Plan will return any rise in the FTSE over the term of the plan (subject to averaging) without any upper limit. An arrangement fee applies to this plan.
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 medium term. If this is the case, they could not only beat the current low interest rate environment but also the stock-market.
Returns not guaranteed
Anyone looking for a competitive return from their savings, especially during this ISA season, is facing some major challenges. Whether it’s your bonus rate coming to an end or a fixed rate about to mature, the range of interest rates available remains stubbornly low, regardless of the term you are considering.
With the potential to achieve more than twice the returns currently available from leading fixed rate bonds, these plans are all strong contenders for this ISA season. However, it is important to remember that unlike fixed rate bonds, the returns from all of the above plans are not guaranteed. They could result in a return of your initial capital only, in which case a fixed rate bond would have been the better option.
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 a worthy complement to the more traditional fixed rate savings options.
With the prospect of this 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. Tax treatment depends on legislation and your individual circumstances which may change in the future.
All of the plans detailed are available as a Cash ISA and accept Cash ISA transfers and most also allow you to take out your Cash ISA for the next tax year at the same time as the current tax 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. Before transferring an ISA please check there are no penalties for withdrawal from your existing ISA provider.
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.
© Fair Investment Company Limited