Low cash ISA rates - What are my options?
In the last tax year over 11 million new cash ISAs were opened, hitting a value of £38 billion according to HMRC.
Since the 2011/12 tax year, the rates of interest being offered to UK savers on ISA accounts have tumbled, with many cash ISA providers now offering rates that are lower than the prevailing rate of price inflation, which measured at 3% as at end of November 2012.
Use your cash ISA allowance or you will lose it!
The great advantage of cash ISAs is that any interest you earn is tax-free. The current 2012/13 cash ISA allowance is £5,640 per individual, and you have until 5th April to use the allowance or you will lose it forever. If you're concerned about low interest rates, shopping around to get the most out of your hard-earned cash has never been more important.
What are my cash ISA options?
If instant or easy access is important to you, you'll need to lower your expectations regarding the rate of interest you're likely to earn. Most instant access cash ISA accounts on a balance of £1,000 would pay no more than 2%, according to Moneyfacts (January 2013). For example, the Scottish Widows e-Cash ISA, which allows instant access, is currently paying 1.80% AER.
If you are happy to tie up money for a fixed term then you should be able to get a better deal. Fixed rate cash ISAs typically range from one year to five years, although very few providers are currently offering four and five year products. If this option appeals to you, Halifax are currently offering a three year fixed rate at 2.35% AER.
Alternatively, if you are looking for something a bit different that has the potential for considerably higher growth returns, you could look at structured cash ISA deposit plans. These plans work by protecting your initial deposit, but at the same time any stated returns are dependent on the performance of an index, often the FTSE 100. Plans are usually for a fixed period of between three and six years, and range from income plans like the Societe Generale UK Range Deposit Plan (currently offering the potential to return 7% a year) to growth plans like the Investec 3 year Deposit Plan, which currently offers a target return of 15% after three years, provided that the FTSE 100 index is higher than its starting level after three years.
If you view your cash ISA as a long-term savings solution, or are one of the 30% that sees ISAs as an alternative to a pension, structured deposit plans can offer the protection normally associated with a bank or building society account, plus the potential for returns linked to the stock market.