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Web round-up: the ups and downs of investment ISAs

March 10, 2009

With ISA season coming to an end in less than a month, investors need to act sooner rather than later to make the most of the tax-free benefits on offer. You can not carry your annual allowance of 7,200 pounds into the next tax year, so it is a simple case of ‘use it or lose it’.

But with interest rates plummeting to an all time low, returns on cash individual savings accounts are miserly. So are stocks and shares ISAs a better home for your money? Financial experts certainly seem to think so – and so it would appear do investors.

A report by Barclays Stockbrokers says that the Bank of England’s decision to cut interest rates to 0.5 percent has led to a change in outlook for savers, with 63 percent saying that equities will provide the best returns this year. Of those planning to invest in a stocks and share ISAs in the 2009 tax year, 74 percent say they intend to maintain the same level of investment as 2008 and 20 percent plan to increase their investment.

Barbara-Ann King, Head of Investment Strategy at Barclays Stockbrokers said the report shows that “cash is no longer king.”

Dan Clayden, independent financial adviser from Clayden Associates, agrees: “The FTSE is around 40 percent down on its peak, so to me the equities market looks very appealing.”

Meanwhile, Tamsin Brown on whatinvestment.co.uk writes that investors looking to gain any serious returns from their ISA allowance will have to move out of their comfort zone. “Those looking to invest in a cash ISA at the moment will be lucky to find one offering much above the rate of inflation. Therefore, ISA investors seeking tax-free income this year have to be prepared to take on a little risk if they want their yield to do more than just keep up with the increase in the cost of living.”

However, Jennifer Hill at timesonline.co.uk writes that investors should be wary of the pitfalls. “Supposed ‘safe havens’ are not as low risk as they might seem. Money is pouring into corporate bond and equity-income funds, which can both be held within a stocks and shares ISA, since some are yielding up to 10 percent against an average of only 1.99 percent for cash ISAs. However, advisers said many savers may not appreciate the risks.”

Timesonline.co.uk also asked financial experts where they will be putting their money, with most saying that they also see the plunging markets as an opportunity. Some report a threefold increase in investors putting their money in stocks and shares rather than cash ISAs.

Recent rules changes allowing investors to transfer money from a cash ISA into a stocks and shares ISA without losing the tax advantages (though you can’t move it the other way) has also encouraged more people to opt for an equity scheme. Moneysavingexpert.com points out that ISA providers like to let you think your money is locked in and has a handy guide to transferring funds from one ISA to another that offers potentially better returns.

Anyone looking to make a quick buck from a stocks and shares ISA is likely to be disappointed. The message from experts seems to be the markets could drop further and any investment should be seen as long-term. The other key theme is diversification – spread your assets around and, whatever you do in these turbulent times, don’t put all your eggs into one basket.

Elsewhere from around the web, thisismoney.co.uk has a guide to choosing the best ISA and information on the best rates available, which is updated daily.

You have until 5 April to use up your annual tax-free allowance. You can invest up to 3,600 pounds in a cash ISA and 7,200 in a stocks and shares ISA, or split your money between both.

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