5 APRIL will be the last day this tax year to shelter your savings under an ISA. With stagnant wages and inflation biting into savings, holding savings in cash is not a good idea.
Mervyn King will likely be sending letters to George Osborne apologising for high inflation for a while to come. The 2 per cent inflation target has morphed into a mere aspiration, which the Governor has no intention of meeting any time soon. Based on RPI, the pound in your pocket has devalued by 22 per cent in the last ten years. There is no reason to think the next decade will be any different.
All savers will be hoping to beat inflation, but this is going to be tough with CPI inflation running at 4 per cent, RPI inflation at 5.1 per cent, and interest rates at 0.5 per cent. No cash ISA on the market comes close. The best currently available is from Santander, who offer 3.3 per cent for new, or 3.5 for existing customers. If an inflation beating cash ISA doesn’t hit the market soon, you could be better off using all of your £10,200 allowance for a stocks and shares ISA, especially if you are looking to invest over the medium to long-term. For example, although not indicative, the AXA Global High Income fund, HSBC FTSE 200 Index, and Aviva Inv UK Growth have risen 25.90, 28.96 and 20.44 percent respectively over the last three years.
If you intend to opt for a stocks and shares ISA, the crucial decision is whether you choose a cheaper passive fund, or a more expensive active fund. Tom Rampulla of Vanguard argues that because of the high fees and variable performances of active funds, passive funds are better value over the long-term: “By choosing low-cost funds, such as index trackers within an ISA, investors can keep more of their tax relief.” Rampulla says that “while the savings from a low-cost fund may not seem huge over one year, they add up over time and can make a significant difference to your return.”
Tom Stevenson, Investment Director at Fidelity, agrees that fees can “act as a drag” but suggests that actively managed funds can add value. For example, he points out that if an investor wants to protect their wealth against high inflation, they could use an ISA to invest in a fund that focuses on companies able to pass on the costs of inflation through pricing power. By analysing supply chains, these funds focus on companies that will pass inflation on to customers. For example, in car manufacturing such a fund would invest in producers of iron ore and copper.
The choice between an active or passive ISA should come down to personal preference based on adequate research. As Carl Howard, Head of Direct Investments at Barclays says: “the question of whether to go for an active fund ultimately comes down to whether the investor thinks the fund manager will be able to achieve the returns for them”.
Even with an ISA you could still struggle to beat inflation by much. However, if you are trying to save, the chances are you will be worse off without one. The opportunity to squirrel away £10,200 from an increasingly fervent taxman, should not be passed up.