AS CASH ISAS LEAVE SAVERS DESPAIRING, IT COULD BE WORTH TAKING A CHANCE
The past few years have been a grim time for savers. After the Bank of England cut its base rate last month to a record low, anyone hoping to earn from their funds will be forgiven for uttering a sigh of desperation.
Among the most notable casualties have been cash Isas, with the average rate paid standing at just 0.99%, and potentially more gloomy news ahead. “Savers should brace themselves for more cuts to come,” says Rachel Springall, finance expert at Moneyfacts. Last week, NatWest became the latest bank to slash rates: its cash Isa now pays just 0.01%. But amid the gloom some solace for savers can be found at Principality Building Society, which pays online savers 1.1% on £1 and above.
However, for those who want to try and make their savings work harder there are alternatives – but with greater returns comes greater risk.
Around 23 million Britons hold almost £50bn in Premium bonds, lured by the prospect of winning between £25 and £1m in the monthly prize draw. Each bond costs £1, with a minimum investment of £100 and maximum of £50,000. Your money is 100% secure and all prizes are free of tax.
Justin Modray at Candid Financial Advice says this is a safe way of having a flutter, and today’s average prize rate of 1.25% looks reasonable. But he adds: “Don’t put too much faith in striking it rich. If you do win a prize, 93 times out of 100 it will be just £25.”
Risk rating: 2/10 Bonds pay no interest and you may never win anything.
High-interest current accounts
In a strange twist, many current accounts now pay up to 5%, far higher than cash Isas and savings accounts. Santander 123 pays 3% on balances between £3,000 and £20,000, but this will fall to 1.5% on 1 November.
“It still offers cashback on your everyday spending, but you can get better interest rates elsewhere,” says Anna Bowes at rate tracking serviceSavingsChampion.co.uk.
Nationwide FlexDirect pays 5% for 12 months on the first £2,500, but you must pay in at least £1,000 each month. TSB Classic Plus also pays 5% on up to £2,000 if you pay in £500 each month.
Risk rating: 1/10 Your cash is safe, but only a small amount attracts interest.
Science writer Hazel Muir, 49, has invested in cash Isas since their launch but now gets more than double the return by lending money through peer-to-peer (P2P) platforms.
Muir, who lives in Tunbridge Wells, gets up to 4.8% from P2P ratesetter.co.uk.“P2P rates have also fallen, until recently you could get 6%,” she says.
Online-only P2P platforms work by taking money from savers and lending it to vetted borrowers. Zopa pays between 3.5% and 6.7%, depending on risk, while Ratesetter pays an average 5.3% over five years.
“Your money is not covered by the Financial Services Compensation Scheme (FSCS), but I think that is a risk worth taking,” she says.
Risk rating: 5/10 Borrowers could default with no FSCS protection, though some platforms run contingency schemes to cover losses.
Corporate bonds issued by companies can help you beat dismal cash returns.Damien Fahy, founder of moneytothemasses.com, says you can spread your risk by investing in a fund of bonds using your tax-free Isa allowance.
The Kames Investment Grade Bond currently yields 3.15% and has returned 52% over five years, according to trustnet.com, while the Artemis Strategic Bond yields 4.1% and has grown 42%.
Another option is a retail bond. The York Green Wind one-year bond pays a fixed 5.5% if you lend to a firm that runs a portfolio of four wind turbines.
Risk rating: 4/10 Some say bonds are over-priced and defaults are always a danger.
Stocks and shares Isa
You can invest up to £15,240 in a stocks and shares Isa this tax year, with all returns free of income tax and capital gains tax.
The FTSE 100 is up 30% over the past five years, but many fund managers have done far better, with MFM Slater Growth returning 93%, and Fundsmith Equity growing 174% – although past performance is no guarantee of future success.
“Stock markets are volatile, but in the longer run should beat most alternatives,” says Patrick Connolly at Chase de Vere. He tips Rathbone Income, Artemis Global Income, Threadneedle Global Equity Income, and M&G Property Portfolio.
Risk rating: 7/10 Shares are always risky, so spread your risk and hold on for the long-term.
Setting yourself up as a buy-to-let landlord has been one of the most rewarding investments of the past 20 years. However, former chancellor George Osborne made life harder by slapping a 3% surcharge on second home purchases, reducing wear and tear allowances and phasing out higher rate tax relief from next April. Investors also need to find a deposit, and pay for stamp duty, mortgage arrangement fees and doing up the property.
Jonathan Daines, chief executive of lettingaproperty.com, says rental demand should stay strong as people struggle to get on the property ladder: “Bricks and mortar are still an attractive investment opportunity due to low returns elsewhere.”
Risk rating: 7/10 You can’t dissolve it if you need your money immediately.
Adrian Ash, head of research at gold broker BullionVault.com, says the metal has thrashed all rivals since the start of the millennium: “It is up 465% in that time, against a 164% rise in house prices, 96% total return from the FTSE, and 55% on cash. It has also performed over the past 12 months, rising 45% against just 0.4% on cash.”
However, this supposed safe haven can be volatile; its price dropped 25% in 2013. It also pays no income, you incur trading costs and it has to be stored securely.
Risk rating: 7/10 Gold has dazzled but could be vulnerable at current high prices.
Fine wines are one investment you can drink to. Industry index the Liv-ex Fine Wine 100 is up 10.7% over the past year, though it trades 22% lower than five years ago.
Simon Staples, sales director, fine wine, at merchants Berry Bros & Rudd, says around £10,000 is needed to start. He recommends sticking to Old World wines, typically Bordeaux, Burgundy and champagne, but says they must be stored carefully, ideally in a humidity- and temperature-controlled warehouse. If it does not perform financially at least you can drink your losses.
Risk rating: 8/10 Beginners really have to know what they are buying.
Venture capital trusts
High-risk venture capital trusts offer tax breaks to incentivise people to invest in smaller, growing companies. Laith Khalaf, senior analyst at Hargreaves Lansdown, says you get 30% income tax relief for subscribing to new fund raisings. You can invest up to £200,000 each tax year, though you cannot save more income tax than you actually pay. Most returns are paid as tax-free dividends during the life of the VCT, Khalaf says. You can start with as little as £3,000 and should hold it for at least 10 years. “If you sell in the first five years you must repay any tax relief,” Khalaf says.
Risk rating: 9/10 High risk but the tax breaks make it worthwhile for some.
Instead of 1%-2% a year from cash, you could earn 5%-10% in a day from spread betting – or lose the lot. Josh Mahoney, market analyst at IG, says spread betting involves speculating on the price movement of a stock, index, commodity or currency without buying the asset itself. This allows you to speculate on the outcome of a major political event – such as the impact of Brexit on sterling or the oil price during an Opec meeting. Such betting is classified as gambling so there’s no stamp duty or capital gains tax on winnings. But, as with all gambling, the losers vastly outnumber the winners.
Risk rating: 10/10 In a few minutes you can lose more than your original deposit.
On the road that can lead to more than 12%
Amy Jackson hopes life in a VW Camper van means she will be to pay off her fixed-rate mortgage in three years. Photograph: Stephen Shepherd for the Observer
Faced with earning a meagre 0.25% from an instant access cash Isa, Amy Jackson decided to hit the road. Instead of paying £13,200 into the tax-free wrapper in March she invested in a VW Camper T5, buying the 10-year-old converted van for £11,500 and spending £1,700 on new upholstery, service, tax and insurance.
Amy, 47, an agricultural consultant, plans to keep the van for three years. “Then I’ll use the proceeds, along with my other savings, to pay off my fixed-rate mortgage.” She expects to sell the vehicle for around £11,000, but should still come out ahead on her investment.
She and partner Greg McGlothlen calculate it will save them a small fortune on holiday costs and weekends away: “We plan to explore the UK and it should save us a net £2,000 a year in flights, hotels and meals out.”
That would add up to savings of around £6,000 over three years. After deducting an estimated £700 a year for servicing, tax and insurance, this would leave her with a £1,700 “return” on a £13,200 investment, a total of 12.88%.
The return could be even greater as they also save on £35 a day boarding fees for their two dogs Sally and Seth, who holiday with them in the vanAmy has named her van “Isa” – but it is set to give her a far better run for her money than 0.25%.