It’s that time of year again when savers are repeatedly asked the same old questions: do you have an ISA, did you invest your 2016/17 ISA allowance, have you decided where to put the new allowance?
In previous years the answers were pretty straightforward, but things aren’t so simple these days. It’s rather like a countdown conundrum where all the options are there but you have limited time to digest and decide which one is the most appropriate. So how best to solve this puzzle? Let’s look at the facts and examine some of the best deals on offer.
How much can I invest and what options are there?
The 2017/18 tax year brings a bulkier tax-free ISA allowance of £20,000. This is fantastic news for savers, but with the average rate on Cash ISAs falling from 1.28 per cent to 0.88 per cent in the last 12 months, it’s clear to see why savers should think extra hard about how to best maximise their return, particularly over the longer-term.
Savers have the choice of normal Cash ISAs, supportive Help to Buy ISAs, brand new Lifetime ISAs and Stocks & Shares ISAs, to name a few, all of which have their perks and limitations. Which is the most appropriate will depend entirely on the investor, how they want to use it, and how much they want to receive as a return.
ISAs versus non-ISAs
Cash ISAs are undeniably the most popular of all ISAs, but they also provide poor returns in comparison to other types. The best you’ll get on an easy access ISA right now is 1.05 per cent from Coventry BS, and the best fixed rate comes from Principality BS, which pays 1.95 per cent over five years.
If we were to look away from ISAs and focus on standard savings accounts, we’d find a rate of 1.15 per cent on an easy access account from Yorkshire BS and 2.35 per cent on a five-year bond with Ikano Bank. What’s more, since the Personal Savings Allowance (PSA) came into force each basic rate taxpayer is entitled to the first £1,000 of interest earned completely tax-free (£500 for higher rate). This means that if you were to invest the full ISA allowance of £20,000 into either deal you’d still remain under the limit. However, if interest rates do rise in the future, then the PSA could certainly be breached, and that’s why ISAs can still prove their worth.
Help to Buy ISAs are ideal for first-time buyers, as they receive a 25 per cent boost from the government and benefit from some of the best interest rates on offer by the biggest high street banks, such as Barclays which pays 2.25 per cent. But a word of caution for those who decide not use the money to buy their first home – you will not be entitled to the bonus. In addition, those who do use it for their first home won’t actually see the bonus, as it’s paid directly when contracts are exchanged.
Lifetime ISAs are new to the ISA world. Once again, the government will contribute a 25 per cent bonus, either for first-time buyers or those retiring, but you must be aged between 18 and 39 to be eligible to open one and you can only save up to £4,000 a year. This product was designed to support people with the short-term goal of buying their first home and/or the long-term goal of saving towards retirement. While very few providers have expressed an interest in launching a cash option, there has been more positivity from the stocks and shares side of things.
Cash versus stocks
Speaking of stocks and shares, while past performance is no guarantee for the future, it is still positive to see that 2016/17 seems to have been a fantastic year for investment ISA performance (15.8 per cent growth on average), with such growth not seen since the 2009/10 tax year (34.5 per cent), according to Moneyfacts/Lipper data.
The clear majority of fund options available to Stocks & Shares ISA holders performed well, with just 33 out of the 979 funds surveyed (3 per cent) failing to deliver growth during the 2016/17 tax year. A Stocks & Shares ISA can be an interesting way to invest, as there are many sectors to choose from. In terms of Investment Association sectors, the standout ISA performers during 2016/17 were Japanese Smaller Companies (40.1 per cent), North American Smaller Companies (37.3 per cent) and Japan (32.5 per cent).
Despite these lucrative potential returns, Cash ISAs will likely remain the default choice for many savers, but with interest rates so low and inflation rising, it might be time for a re-think.
Rachel Springall is a Finance Expert at Moneyfacts.co.uk