No imminent rate rise: five options for cash ISA savers
Ongoing low inflation, weaker economic data, global uncertainties and the weakness in the oil price place little pressure on the Bank of England to lift interest rates anytime soon. The seventh anniversary of the Bank of England base rate hitting 0.5% base rate is just around the corner in March 2016.
The average variable rate cash ISA now pays just 0.85%, including any bonuses offered by providers. The rate stood at 0.99% in November, so this represents a fall of 14%.
Options for cash ISA holders
- Stick with it
The tax savings of ISA are cumulative and rates will rise at some stage. You can shelter £15,240 in an ISA in this tax year and for most people this is very sensible, blue chip planning. Cash ISAs often pay higher rates than standard cash savings with the tax free nature of the interest an extra benefit.
- Review regularly
Savers should regularly check the rates of interest they receive on their cash ISAs – it can be easy to miss a notification of a rate cut – and transfer to a higher paying account to improve their returns.
- Go long
Higher rates are usually available for those who lock some of their money away for a fixed term. When choosing a fixed term, consider the prospect of interest rate rises. A four or five year fixed rate bond may look like a better deal now, but could look poor as and when rates do rise.
- Invest in search of better returns
Investors can transfer cash ISAs into a stocks & shares ISA in search of improved returns though it’s riskier and investors must be happy to accept the ups and downs of the markets for the potential of longer term gains.
Equity income funds are a firm favourite for investors transferring cash ISAs. They aim to invest in profitable businesses which can grow their earnings over time. Many offer a healthy starting yield, (3-4%) and the income they pay has the potential to rise. As profits and dividends increase, the shares become more attractive, and investors should also enjoy long term capital growth.
- Lend in search of better returns
Peer to Peer (P2P) providers match lenders and borrowers to provide investors with attractive interest rate returns as an alternative to traditional gilt, corporate bond and fixed interest investments. P2P is an investment, not a cash alternative, so is only for those who accept risk to their capital and interest. From April this year the new Innovative Finance ISA will allow investors access to P2P products within a new, third way ISA. A good “rule of thumb” is that the higher the interest rate offered, the more risk you’re taking on.
Danny Cox is a chartered financial planner at Hargreaves Lansdown