Don't put up with low cash ISA rates: transfer for better returns
Cash ISAs are a safe tax-free vehicle for your savings, but due to interest rates staying historically low for a decade, savers have seen little growth in their pots. The good news is you can transfer your cash ISAs to get better rates, or consider transferring to an investment ISA.
Cash ISAs are seen as the safest of safe havens — a reliable option for conservative savers, offering tax—free growth over time. But it seems that UK savers have had enough. Earlier this year, data from UK Finance found that just £322 million was invested in cash ISAs in March 2018, down from £773 million in March 2017. According to a recent analysis by Moneyfacts, 2017 was the worst ever year for cash ISA returns, with the average instant—access account offering just 0.93% — more than 2% lower than the (then) rate of inflation.
Despite speculation that the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) will vote to increase the base rate in August 2018, savers are already suffering from the effects of a long—term low interest rate environment. It’s no surprise then that even the most conservative savers are now considering a move from cash ISAs to investment ISAs.
Can you transfer money from a cash ISA to an investment ISA?
Yes. Every UK taxpayer is entitled to save up to £20,000 each year within an ISA wrapper of any description. This allowance resets on 5 April each year. However, ISA transfers can happen at any time, and don’t count towards your annual allowance. So, if you saved £20,000 last year and another £15,000 in the current tax year, you could transfer the full £35,000 from one ISA account to another without paying any tax. Furthermore, if you had earned 1% interest on your £35,000 savings pot, that interest could also be transferred without affecting your remaining allowance for the year.
It is quick and easy to transfer money from a cash ISA into an investment ISA, such as a stocks and shares ISA or innovative finance ISA. Most platforms will allow you to make transfers for free — and some even offer transfer bonuses to attract new customers.
However, it is worth checking up on any hidden fees which may be added by your old provider or new platform. Some cash ISA accounts charge an ‘exit fee’, while some investment ISA providers may charge administrative fees, management fees and share—picking fees.
Furthermore, not all ISA providers allow transfers, and even fewer allow their customers to transfer part of their cash ISA balance. In the majority of cases, if you choose to transfer you will have to move your entire ISA balance at once.
To avoid any nasty surprises, make sure you read all the small print before making any big financial decisions. And if you want to keep your costs at a minimum, consider transferring your cash ISA into a low—fee investment structure such as one based on exchange traded funds (ETFs), rather than an expensively—managed fund.
How do you minimise volatility and risk in an investment ISA?
Cash ISA investors typically do not like to take unnecessary risks. In fact, over the past few years they have even been willing to put up with interest rates below the rate of inflation, meaning that their savings were actually losing value in real terms. They are clearly not driven by high returns, but simply prefer the security of bank—based, tax—free savings which won’t dip dramatically in value. Even if you decide to stick with the safety of a cash ISA, you should look around to see whether you can get better interest rates than you’re currently getting.
While few investment options are as safe as a cash ISA, there are some ways to minimise the potential risk that comes with transferring your money from a cash ISA into an investment ISA.
Government bonds and corporate bonds are similar to cash ISAs in that the investor’s money is locked away for a certain amount of time, and subject to a relatively small rate of interest, which is paid monthly, quarterly or annually.
The FTSE 100 is often recommended as a good starting point for risk—averse investors who want some exposure to the UK equities market. The FTSE 100 index is made up of those companies with the highest market capitalisation on the stock exchange, and this includes some of the UK’s best—known brands. Exposure to an index means you’re not overly exposed to fluctuations in individual stocks, although indices can still fall sharply in a downturn.
Even the most experienced investor will keep a portion of their funds in cash as a hedge against bond defaults and stock market volatility. Cash holdings are exactly what they sound like — the money is simply held with an investment manager or bank, paying little—to—no interest. By keeping a substantial portion of your stocks and shares ISA in cash, you could miss out on the higher rates of interest offered by bonds and equities. However, for former cash ISA investors, this is as close as you can get to maintaining tax—free cash savings while diversifying your money across other sectors at the same time.
Conservative investment options do exist, and particularly nervous investors can even keep cash exposure within their portfolio. By spreading your money across bond—based ETFs, FTSE 100—tracking ETFs and even cash—focused ETFs, you could beat the best cash ISA rate on the market, without upending your financial philosophy.