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Jan 2013

Latest cash ISA options for your savings

A lack of competition in the savings market is hitting cash ISA savers hard. With the deadline for cash ISAs approaching (5th April), savers need to consider the best way to use their cash ISA allowance for the current 2012-13 tax year before they lose it forever.

With some cash ISAs offering the potential for as much as 7% income each year, and some growth plans offering uncapped returns, we take a look at where the cash ISA focus is shifting to this year.

Cash ISA savers hit hard

In the current economic environment, UK cash ISA savers have had to deal with a period of record low interest rates. This has seen interest rates plummet to levels that haven't been seen since ISAs were launched in 1999. Many people who took out cash ISA plans which featured a 12-month bonus are now seeing the rates of interest they receive dropping to levels that are well below the rate of inflation.

However, in many cases, you don't have to put up with this situation. If you're an existing customer and your ISA provider offers a newer version of their account with a better rate, there's nothing stopping you moving to the newer version. Unfortunately, banks won't usually do this for you and will rarely notify you when new accounts with preferable rates are released. In addition, many accounts that previously offered competitive rates are now closed to new customers - and once this occurs the interest rate can drop dramatically.

Are you getting an inflation-beating return on your cash ISA?

The impact of inflation on your cash is significant over time - consumer inflation is currently running at 2.7% while the Retail Prices Index rose to 3.1% during December 2012. These inflation levels are above the 2% target that the Bank of England has been set.

While you benefit from receiving any income and/or growth tax-free with a cash ISA, you still need to receive more than the prevailing rate of price inflation to ensure your money is keeping its value in real terms. This should be a priority over the medium to longer term.

Reduced cash ISA opportunities

At the time of writing, there is a distinct lack of competitive cash ISA deals across both the variable and fixed-rate markets. Unfortunately, the time where committing your money for the longer term was a way of getting a better rate appears to be over.

A glance at the UK bank and building society offerings across the cash ISA market shows that many accounts are paying as little as 0.05%. Even at the more competitive end of the spectrum, nothing in the fixed-rate space is currently paying much over 3%. What's more, many of the better cash ISA deals on offer are only available to those with £40,000 or £50,000 already in their cash ISAs to transfer.

Don't wait until the last minute

Although you've got some time before the deadline for this tax year on 5th April, don't leave your cash ISA decision to the last minute. Since our ISA allowance is lost forever if we don't use it during the tax year, the combination of continued low interest rates and a poor value offering from banks demands our immediate attention.

Cash ISA transfer

For those people who have cash ISAs already, you have the right to transfer your ISA from your existing provider if you're not happy with the returns you're getting. For those savers who have more than one year's cash ISA allowance put aside, the impact of not acting is even greater, with each day that passes potentially reducing the spending power of your hard-earned savings.

Increasing pressures brought about by the current market conditions are putting more pressure on savers to take a hard look at how they manage their money, and this has resulted in the growth of alternative cash ISA savings plans, usurping the more traditional fixed-rate bonds.

Structured deposits bridge the gap

The changing interest rate environment in the UK has seen a shift of focus towards structured deposits over fixed rate bonds. Structured deposits have flourished in this low-interest environment as they combine full protection of your capital with a potential upside. By linking your return to the future performance of an index, normally the FTSE 100, these savings plans offer the opportunity to achieve higher returns than would currently be available from a fixed-rate bond over a similar timescale. This potential return is balanced against the index not performing as required - in which case you would only get back your initial deposit, with FSCS protection available up to the normal deposit limits.

Income Cash ISA selections

For those looking for income, Societe Generale's UK Range 7 Plan offers the opportunity for an attractive 7% (gross) for each year the FTSE stays between an upper and lower range, based on its level at the start of the plan. The range increases each year - starting at +/- 12% in year 1, ending at a range of +/- 25% in the final year - thereby providing an annually expanding range within which the FTSE can move. If the index moves outside of this range, the income is not paid for that year. The maximum fixed-rate bond over five or six years is currently offering little more than 3%, and so this type of income plan is proving particularly popular.

Growth cash ISA selections

Investec's 3 Year Deposit Plan offers a fixed return of 15% (gross) if the value of the FTSE at the end of the term is higher than its starting value, subject to averaging. This equates to around 4.31% compound and, compared to our current leading three-year fixed-rate bond, offers the potential for a 1.36% annual premium.

For those who don't want a cap on any potential returns, and prefer a five year timeframe rather than six years, Investec's Deposit Growth Plan offers to return any rise in the FTSE over the term of the plan (subject to averaging) without any upper limit.

The downside to these plans is that if the FTSE only goes up by a small amount, or goes down over the term, you may find that you'd have been better off with a fixed-rate bond after all when it comes to returns. These plans are therefore designed for those who expect the FTSE to rise in the future, catering for the five-year timeframe.

Make the most of your 2012-13 cash ISA allowance

With the current market for both variable and fixed-rate cash ISAs offering some of the lowest interests on record, and with inflation posing a very real threat to the buying power of our money, structured deposits have risen in popularity. They offer a viable alternative, or at the very least a strong complement, the more traditional fixed-rate savings options.

With the prospect of this economic situation continuing for some time, savers should consider all the options carefully to maximise the returns from their ISA allowance and take advantage of this valuable tax break.

Compare structured deposits »

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.

These are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.

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