The ISA is a fantastic tax break for UK savers from the government. But as we face a new financial landscape, of low exchange rates, the bad ISA has emerged. With low interest rates, long-term contracts and high fees the UK saver needs to be savvy to the dangers of the bad ISA.
Low rate of returns
The most popular type of ISA in the UK is the cash ISA. But according to the FCA some cash ISA providers are offering interest rates as little 0.1%. The first thing savers and investors need to look for are rates of return that beat inflation. Inflation is currently 0.6% (it has just gone up from 0.5%) which means if you had that ISA earning 0.1% you would be losing 0.5% on the real value of your savings each year.
According to Bank of America Merrill Lynch inflation could be as high as 3% by the end of year. This is the result of a drop in the value of the pound after the vote to leave the European Union. This puts the value of all cash savings at risk, in today’s money you could be able to buy 3% less with your savings in the future.
Individuals need to start looking for an alternative to the cash ISA in case inflation starts to rise. Moneyfarm offers investment portfolios tailored to your profile which takes into consideration your time horizon and attitude to risk to ensure you have an investment portfolio that works for you.
Fixed term savings accounts
Individuals should be able to access their money at the time when they need it without being penalised. That’s why the government introduced the flexible ISA allowance in April. Contrary to popular belief flexibility actually encourages people to save, if individuals know they can get to their money easily they are more likely to save or invest in the first place.
However, the best rates on cash ISAs come with fixed terms, locking your savings away for a year or even more. You can access your money sooner but this often comes with hefty penalties. When interest rates are low this could mean you end up getting back less than what you put in.
Unfortunately, the stocks and shares ISA providers aren’t much better, many take two weeks or more to give you access to your savings or charge you for doing so. At Moneyfarm we will never charge you for a withdrawal and it will take a matter of days for you to have the money in your current account. It is possible to get strong returns combined with flexibility to ensure you have an ISA that works for you.