To maximise your savings, many financial advisers recommend ISA’s
Such Individual Savings Accounts (ISA) are tax free savings where a wide range of investments (cash, stocks, shares, etc.) can be invested in. There is no income tax to pay, and no tax on profits. The interest rates are usually relatively high. These factors make ISA’s great for long term savings.
Savvy savers already know all about ISAs, with many already investing in one. January 2015 sees the usual deadline of April and the end of the financial year looming, and only a few months left to make the most of the cap on Isa’s, which under new rules allows for up to £11,880 to be invested by any one person in their ISA.
April 2015 will see savers allowed to invest as further £11,880 over the next financial year, if they so desire. Financial advisers regularly recommend ISA’s as a convenient method of long term savings, with guaranteed and tax free returns, and (in some cases) a degree of flexibility. Even if not utilised fully, ISA’s are still a very well recommended method of saving.
Despite that, the issue over interest rates remains. In 2007, prior to the great economic crash, ISA rates stood at a respectable 5.5% on average. Following the crash, rates slumped dramatically. 2014 saw ISA rates on a one year’s cash ISA fall to 1.6% on average.
Recently, the Bank of England’s Monetary Policy Committee (MPC) kept interest rates at 0.5%. All the indications are that that rate is set to remain until mid-2016 or so. Given the instability in the Eurozone, and recent quantitative easing (QE) from the European Central Bank (ECB), it is unlikely that the Bank of England will be in any rush to raise interest rates.
2014 saw predictions that interest rates would rise. That was dashed by Threadneedle Street. Now, revised estimates and predictions have the interest rates pegging at the same low level for some time.
This trend could be seen for some time to come, according to financial advisers and economists. According to Wealth Horizons financial advisers, even the most dramatic of financial predictions have seen the Bank of England’s interest rates at 1.5% in 2020, meaning that ISA savers will have to wait until around 2025 before the generous rates of old are seen again.
With interest rates likely to remain low for the foreseeable future, many banks are offering, and many savers are settling for, a fixed rate ISA. Such ISA’s will pay more interest- but will tie up savings and cash for longer. Generally, the longer the savings are tied up for- the higher the returns will be. Also, such a fixed rate ISA over the long term gives the saver a feeling of stability and security. The great benefit of the fixed rate account is the very fact that interest rates are going to be low for a good few years. As such, the interest accrued on the capital over that long term will be greater than the interest accrued in shorter, more flexible savings. Consequently, such long term, fixed rate ISA’s can actually be a very good option. However, if interest rates do start to rise, than that advantage is lost.
A further matter for ISA savers to consider are ‘teaser rates’; high interest rates which banks boldly advertise. According to Chris Williamson, the head of Wealth Horizons “Isa savers are often drawn into headline grabbing rates in the run up to the Isa deadline – teaser rates which then vanish after a few months.. People should never assume that the price they get when they open the account is what they will have for the lifetime of the Isa.” Financial regulator the Financial Conduct Authority (FCA) has long criticised the practice- but has yet to take any affirmative action against banks and teaser rates.
Susan Hannums, director at a savings advice web site said that recent years have seen a disconnection between bank savings rates, and the national base interest rate. Thousands of variable savings rates have been cut, with no movement in the base rate for nearly seven years. According to Ms Hannums “there seems little reason to believe that when rates do start to rise that all savers will reap the full benefit.” She further advises savers not to “put all your eggs in one basket. Spread your money between a mix of accounts from high-interest paying current accounts, fixed-rate bonds, and accessible variable-rate accounts – which would allow you to take advantage of the best rates on offer now, whilst keeping some cash accessible should better rates become available”
According to some financial advisers, as of January 2015, the Post Office seemingly offers some of the best ISA’s currently.
For fixed rate ISA’s, the Post Office offers the best rates, at 1.95pc (two years) and 2.1% (three years) Virgin Money offers the best rate (1.7%) for a one year ISA)
For flexibility and easy access, the National Savings and Investment (NS&I) Direct ISA offers instant access, no notice withdrawals- and 1.5% interest.
Other notable ISA on offer include a Virgin Money three year fixed rate ISA at 2.15%. For variable rates, Hinckley & Rugby and Furness building societies offered ISAs at 1.6%.