How can you improve your Cash Individual Savings Account (ISA) returns?
It is estimated by HM Revenue & Customs that approximately £518 billion is invested in Cash ISAs. However, the average cash ISA interest rate has fallen from 2.5% in 2011 to 0.6% as at September 2016. That is a reduction in returns of over 75% and it is widely expected this downward trend will continue for the foreseeable future.
Better returns Cash ISA
One option for investors is to transfer their cash ISA to an alternative cash ISA that pays a better return but generally this means you would have to tie your monies up for a fixed period of time, thus losing your flexibility and access to funds.
We believe the main message to take from the interest rate cut in the UK is that ultra-low rates are here to stay for the long term. It seems increasingly likely that rates are not going to rise for at least the rest of this decade, and possibly longer. We would also be surprised if they rose in the United States this year.
Therefore, investors are going to have to get used to earning very little on their cash for much longer than they ever thought. A consequence of this is that investors in search of a return on their capital are being forced into riskier assets.
Stocks & Shares ISA
A second option that is available is to transfer your Cash ISA to a Stocks & Shares ISA. The UK stock market currently has an income yield of over 3.7% (variable, not guaranteed) and also offers the potential for your capital to grow over the long term. You can transfer ISAs from previous tax years without affecting your current ISA allowance (£15,240 for 2016/17) and you also keep all the valuable ISA tax benefits.
However, before transferring, you should ensure you have sufficient cash to cover emergencies. Moreover, unlike the security offered by cash, stock market investments can fall as well as rise in value so you could get back less than you invest.
It is also possible to access other areas of the investment market via a Stocks & Shares ISA such as Commercial Property and Corporate Bonds both of which offer attractive income yields at present well above the returns on cash ISAs. History has shown that diversification, the spreading of your money between different kinds of investments, helps reduce the risk of your overall investment portfolio under-performing or losing money.
Ward Goodman are currently offering a free guide to Investment Planning that provides more information on diversification and investing for income and for further details visit www.wardgoodman.co.uk.
The value of investments can go down in value as well as up, so you could get back less than you invest. This article written as an overview on How can you improve your Cash Individual Savings Account (ISA) returns does not provide personal advice based on your circumstances and if you are unsure of how suitable an investment is for you, please seek personal advice before taking any action.
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