Isa funds to combat low rates of interest

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R yesterday’s inflation figures came in at 4 per cent on the CPI measure, it is expected that interest rates will remain at their current low level for near future. The consensus is that we are unlikely to see a rate hike until late in the third or even fourth quarter. This may be good news for borrowers, but will not be the best of news for savers. For this reason, investors will be demanding that their tax-free individual savings accounts (Isa) work harder with their money to give them worthwhile returns.

Though we may have passed through Isa high season – with every provider advertising its individual savings account wares – there are still plenty of good deals around. According to Kevin Mountford, head of banking at moneysupermarket.com, “A lot of savers tend to make a decision about their Isa towards the end of the financial year and as a result, banks and building societies traditionally launch high profile promotional campaigns in the weeks leading up to 5 April. However, this year we have seen several providers keeping their good deals available beyond the Isa deadline and have even seen some new market-leading products being introduced.”

Nationwide Building Society is offering a rate of 4.20 per cent on its new three-year fixed rate Isa, but this account is only available to existing savers who have had a minimum of £1 in any of Nationwide’s savings accounts for at least three months prior to application. The account pays up to 0.35 per cent more than Nationwide’s current three-year Fixed Rate Isa and can be opened with a minimum investment of £1, transfers are not allowed into the fund from existing Isas.

On the other side of the fence are the offerings available from stocks and shares Isas. The benefit of cash Isas is that money is secure and can be easily accessed if needed, but with the current rates of interest investors will be looking at the potential returns available from equities. Guy Simmonds, Nationwide’s senior manager for investments, says: “Although cash Isas are the most popular, stocks and shares Isas are increasing in popularity. In 2010 stocks and shares Isas saw sales reach £3.9bn, their best year since 2001. There could be a number of factors for this, with one of them being the low interest rate environment making stocks and shares more attractive in comparison to standard savings accounts. Unfortunately, too many customers stop once they have used their cash Isa allowance and fail to take full advantage of their full £10,680 allowance so end up paying tax on the interest they earn on their remaining savings.”

The choice between a stocks and shares Isa and cash needn’t be a case of “either or”, but investors should consider their attitude to risk before they allocate their cash. It is prudent to have emergency funds available before tying funds up in longer term investments like fixed rate bonds and stocks and shares Isas. However, if you have a lump sum to invest for the long term, there are plenty of attractive options out there which could hopefully give you an inflation-busting return on your investment.