Low interest rates tempting ISA savers to discard cash in favour of equities, it is claimed

News - Banking

Written by Ray Clancy

Monday, 09 August 2010 09:08

Interest rates at record lows are drawing ISA savers away from cash to equities as stocks and shares become more attractive, according to new research.

With the latest decision from the Monetary Policy Committee (MPC) to hold the Bank of England base rate at 0.5% and analysts predicting it will stay low for a long time, Chris Linpow, investment specialist at NFU Mutual, says that savers are giving alternatives to cash ISAs some serious consideration.

‘More than 17 million British cash ISA savers are likely to be feeling deflated after the MPC chose to hold interest rates at 0.5% for the 18th consecutive month. This decision does not support savers and is likely to cause many to reconsider their long term options,’ he said.

‘Since 1999, ISA accounts have been a popular choice for hard working savers. However, the tax free benefits of cash ISAs are cold comfort for savers with the latest Consumer Prices Index (CPI) inflation figure at 3.2% while even the best instant access account offers 0.45% below the break even point. Inflation is still well above the Bank of England’s target rate of 2% on the CPI measure,’ he explained.

While Cash ISAs don’t offer the potential returns available on the stock market over the medium to long term, say five years or more, money on deposit is secure and readily accessible.

‘While many cash ISAs are paying interest rates below the level of inflation, many people do not think about the potential income available from equity investments, yet this can be a significant part of any returns available, be it withdrawn or reinvested,’ said Linpow.

‘However, it’s important to bear in mind investments and the income from them may fall as well as rise and investors may not get back all their original capital. While all ISAs are tax efficient, the value of relief from taxation is dependent on personal circumstances and may be subject to change,’ he added.

He believes that the good news for regular ISA savers is that since 2008, all or part of the money in cash accounts from previous years can be transferred into one tax-efficient stocks and shares ISA and still not affect this year’s annual entitlement of £10,200.

‘Someone who has taken their full allowance of tax free cash savings for each of the past 11 years could now have a substantial sum of money generating only modest interest. A stocks and shares ISA could be a very effective way of potentially growing that nest egg over the next five years or more,’ he explained.

NFU Mutual offers a choice of two ISAs: the NFU Mutual Stocks and Shares ISA and the Shrewd Savings Plan ISA. Savers transferring over £10,000 from their existing cash ISA into an NFU Mutual Stocks and Shares ISA can do so with no transfer fee and an annual management fee of 1.25%.