Many savers (I won’t use the term investors) are attracted to cash ISAs for 2 reasons;

1. Monies are helds in a tax free environment
2. Minimal risk

I can’t argue with either except perhaps when the following question is asked;

“Why save into cash ISAs?”

I have long held the view that investing in ISA’s is a fundamental part of a retirement planning strategy. The very use of the word “retirement” means long-term. When thinking long term it’s worthwhile noting that the maximum use of tax free allowances from 1987 (via PEPS) and ISAs (since 1999) have generated in certain cases funds which are now in excess of £1million – tax free and 100% under the control of the investor.

Now take the case of someone who saves in a cash ISA. The following points should be noted;

1. The benefits of tying money up in a fixed rate ISA to get a higher rate of interest have all but disappeared.
2. Whilst there may be a very small increase in rates for 1-3 year ISA accounts, there is no extra benefit to savers if they tie up funds for 5 years.
3. Currently the best rates available are; 1 yr – 2.8%, 2 yr – 2.9%, 3 yr – 3.0%. (Rates available from M&S) 4 yr – 2.8% (Bank of Scotland) 5 yr rate – 3.0% (BM Savings & United Trust Bank)

One should also bear in mind the following;

1. Charges for early encashment can be punitive.
2. Rates for ISAs paying monthly interest/income tend to be lower still.

Interest rates on ordinary savings accounts tend to be slightly higher, however basic rate tax is deducted at source (although it can be reclaimed by non-taxpayers and starting rate tax payers). I believe that the benefits from tying money up for 5 years no longer have the advantages that they once did in the current low interest rate environment. This is not to say that an individual should not have a rainy day fund in which case instant access accounts are an ideal solution. Although they may come with some interest this is not the purpose (see Savings v Investments).

Rates on fixed rate products are at record low levels, savers would be wise therefore not to tie money up for too long, if at all.

It would be as well to remember the following;

• ISA allowance for 2012/13 – £11,280
• ISA allowance for 2013/14 is £11,520
• Cash ISA allowance is £5640 (2012/13) and is £5760 (2013/14)
• It will be possible to utilise upto 100% of your ISA allowance as an investment ISA.
• Level of exposure to equities will depend on an individual’s risk profile.
• Yields from Investment ISAs can be a lot higher than from cash ISAs thereby providing an opportunity for greater tax free income.
• It is possible to transfer from a cash ISA to an investment ISA but not the other way around.
• Investment ISAs offer opportunities for both income and capital growth although this of course cannot be guaranteed.
• Investment ISAs are immediately accesssible and can be rebalanced to reflect changes in a persons attitude to risk

Given the benefit/flexibilities of investment ISAs, it is not surprising that for many of our clients, they do form an integral part of their retirement planning strategy.