28th February 2011
Between now and the end of the tax year on April 5, banks and building societies will tempt us with an array of mouth watering cash Isa offerings – plans that we can put away a maximum of £5,100 in the current tax year without fear that the taxman will come knocking on our door for his outrageous cut (all savings should be tax-free but that's an argument for another day).
In contrast, fund managers will try to convince us instead to ignore cash Isas and invest up to the permitted maximum £10,200 (in the current tax year) in a full blown equity Isa.
Competition is already hotting up. Last weekend, Halifax (part of Lloyds) and Nationwide building society were busy promoting their cash Isa wares in the national press while fund managers Aberdeen, Fidelity and HSBC were busy waving the flag for investment Isas.
It's going to be yet another busy Isa shopping season. Or is it?
According to research just completed by discount fund broker Willis Owen, savers are more risk averse than ever with 38 per cent of them no longer prepared to take 'any risk' with their money – an inevitable consequence of continued economic gloom and uncertain job prospects. This time last year, the 'no-risk' takers, says Willis Owen, numbered 32 per cent.
So cash Isas should prove hugely popular in the coming weeks. But let's be under no illusions here. These 'no-risk' takers are going to find little 'real' savings joy from cash Isas.
So far, Santander and Halifax are offering the best cash Isa deals – between three per cent and 3.3 per cent with the best rates being reserved for existing customers. But with inflation hovering just above five per cent, these products will only help erode the real value of savers' wealth.
Most savers, of course, will ignore this real erosion and be comforted instead by the fact that they are earning interest six times that of base rate. Also, given some non-Isa deposit accounts are currently paying a pitiful 0.1 per cent interest, three per cent plus seems like a 'result'.
The savviest savers – the 72 per cent of us who are risk-takers – will steer clear of cash Isas and opt for an equity Isa. Yet, while this route provides savers with the best way of combating inflation and generating returns, it's also fraught with dangers.
These include the UK economy, plagued by job cuts, stumbling back into recession; rampaging oil inflation on the back of continued unrest in the Middle East; and a slowdown in the economy of the world's engine – China.
Rather than chase an Isa deadline, the best strategy surely is to drip money (via equity Isas) into long established investment funds (unit trusts and investment trusts) over the coming months, using both this year's Isa allowance and next (when it increases to £10,680).
By long established, I mean the likes of investment funds Fidelity Special Situations, Invesco Perpetual High Income, Invesco Perpetual Income, M&G Global Basics, Newton Income, M&G Recovery and Schroder Income. And I also mean the likes of low cost investment trusts Monks, Scottish Mortgage and Witan.
All these funds (and their respective investment teams) have been around the block, seen it, done it and survived it.
As to how to set up these equity Isas cost efficiently, there's only one show in town – low cost discount fund brokers. The best include Hargreaves Lansdown, Chelsea Financial Services, Dennehy Weller & Co and Willis Owen. Alliance and Fidelity are also worth a look at.
Happy Isa hunting.
Jeff is personal finance editor of the Financial Mail on Sunday.
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