Are you keen to use your annual tax-free ISA allowance before the end of the tax year on 5 April? If so, you need to tread carefully. There’s a lot at stake.
Cashing out
Cash ISAs remain hugely popular, far more so than Stocks and Shares ISAs, and the little-known Innovative Finance Isa (IFISA). They are hard to love, though, with the average easy access Cash ISA paying just 0.88%, according to Savings Champion.
You can get more if you are willing to tie your money up, for example, Shawbrook Bank pays 2.3% on £1 and above. That is hardly earth shattering, plus you have to lock your money away for five years.
No platform
The IFISA offers higher rates of interest because instead of putting your money in the bank you are lending your cash to small and growing businesses via a peer-to-peer (P2P) platform. Interest rates average 5.82%, according to reviewer 4thWay, but with no capital protection under the Financial Services Compensation Scheme. If your P2P platform goes bust, you could lose all of your money.
You don’t need me to tell you that you could also lose money by investing in stocks and shares, particularly individual stocks. Yet I put all of my long-term savings into stocks and funds, and I have an aversion to losing money.
With shares there is so much you can do to mitigate risk, for example, spreading your portfolio between a range of different stocks, or building a broadly diversified spread of investment trusts with terrific long-term track records.
You could season this with a sprinkling of low-cost index tracking exchange traded funds covering indices such as the FTSE 100, which currently offers an inflation-busting yield of 4.5% a year.
Take your time
Then you should look to invest for the long term, at least five years but in practice 10, 20 or 30 years, because that way you have nothing to fear from short-term volatility. In fact, you should treat any stock market dip as a buying opportunity, and pick up your favourite shares on the cheap. We have had one or two such opportunities recently.
You are effectively losing money by leaving it in cash, as inflation will erode its value in real terms. The CPI may have fallen to 1.8%, but that’s still higher than even the best easy access Cash ISA, which pays around 1.5%. Despite this, Britain’s savers are currently rushing to put their money into Cash ISAs, depositing a record £1.1bn in January, a huge increase on £275m last year, Bank of England figures show.
Get to work
You should always have some money in cash, but your long-term wealth will work harder in stocks and shares. The figures back me up here. ISAs were launched 20 years ago and fund manager Fidelity calculates that if you had put your full balance in cash every year you would have paid in a total of £141,520 which would have grown to £146,070.
However, if you had invested exactly the same amount of money into the FTSE All Share index, you would have £221,566. That’s a difference of more than £75,000. That’s why I say forget the Cash ISA and focus on stocks and shares.