Is anyone still investing in cash ISAs?
The end of the tax year is approaching and you only have until 5 April to take advantage of your ISA allowance.
An ISA remains one of the best financial tools on the market, but should you be topping up your cash ISA or looking elsewhere?
Cash not necessarily king
The returns from cash ISAs remain dire, which is of particular concern in an environment where inflation could be set to rise. If you are looking for easy access to your cash ISA, like you have with a stocks and shares ISA (assuming there is market liquidity), then you will struggle to find a cash ISA that has an interest rate of over 1% per annum.
If you are happy to lock your cash away for five years, then there is a slight improvement and you might find a provider who can offer you an interest rate of 1.75%.
These figures don’t make great reading, but if you are still holding old easy access cash ISAs then the interest rate you are currently receiving could be even worse. It is worth checking the interest rates on your old cash ISAs now.
What could your ISA be doing for you?
With interest rates at close to all-time lows, it may be worth considering a stocks and shares ISA if you are willing to take on the extra risk.
There are a wide range of asset classes and sub- asset classes that can be held in your ISA, depending on the risk that you want to be exposed to.
However, I have picked a couple of uses for your ISA that you may not have previously considered for your clients or yourself:
1. Make your ISA Inheritance Tax free
By investing in shares on the AIM market your ISA could be free from inheritance tax after two years. This is assuming that you hold the shares at time of death and that the AIM companies held qualify for business property relief.
Some recent surveys have indicated that more financial advisers are recommending AIM, at least some of the time.
In addition, the majority of these advisers can see their use of AIM increasing over the next few years. We feel that this is because advisers are becoming increasingly familiar with the benefits of AIM and we think that this trend will continue. AIM offers a rapid, simple way of mitigating against inheritance tax without losing control of your capital.
In addition, one of the main reasons that advisers are recommending AIM is because of the opportunity to grow a client’s wealth. The recent performance of AIM discretionary fund managers has been strong (although past performance is not an indicator of future returns). AIM is now home to a large number of well-known, growing companies such as Fever-Tree and many more.
AIM investments, however, are not suitable for all investors and are likely to be higher risk compared to stocks traded on the main market.
2. Boost your Income with your ISA
There are also plenty of investment opportunities that can boost your income in an ISA. For example, listed renewable energy vehicles often yield over 5% and frequently have around half of their cash flow effectively subsidised by the government.
In addition, this subsidy is linked to inflation and is far superior to income streams from either cash deposits or government securities, despite also being government backed. Going forward tariffs can change, but it feels unlikely that the UK government would retrospectively remove or reduce feed-in tariffs, on currently built renewable infrastructure, as this would effectively be a government default.
Your ISA doesn’t need to be limited to the woeful cash returns that are currently available. There is a world of choice for this savings tool, which is worth considering.
Find out more about Charlotte Square’s AIM Service and Income Uplift Service and see historical performance figures.
About James Rae and Charlotte Square
James Rae is an Investment Manager at ‘Charlotte Square’, an investment management boutique situated in the heart of Scotland’s financial centre and offering a highly personalised discretionary investment management service for a range of private clients, trusts, pension schemes, corporate funds and charities. He is a member of the CFA Institute and graduated with a BSc Honours in Accounting & Finance from Bath University.
With investment, your capital is at risk. The price of investments and the income from them can go down as well as up and neither is guaranteed. Nothing contained in this article constitutes investment, legal, tax, regulatory or other advice, nor should be relied upon in making an investment or other decision. The tax benefits described in this article are correct at the time of going to print and these may be subject to change by HMRC. Tax treatment depends on individual circumstances and may be subject to change in the future. ‘Charlotte Square’ is a trade name of Raymond James Investment Services Ltd (Raymond James) utilised under exclusive licence. Raymond James is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3779657. Registered Office Broadwalk House, 5 Appold Street, London EC2A 2AG.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.