How to hold £7,200 in a 'Cash ISA'

AlexGreen_2 · 18 February 2008 at 11:53AM

I'm pretty sure I'm right here but I would advise people check for themselves before committing any money.

As you most probably know the ISA rules are changing slightly for this year. The limits are now up to £7,200 but only a maximum of £3,600 in cash, the balance has to go into a 'Stocks & Shares ISA'.

But there is a way to now pay the full £7,200 allowance and keep it all in cash plus earn a great interest rate.

Deutsche Bank is about to list an ETF (Exchange Traded Fund) that will track the Sterling overnight interest rate which at present pays around 5.3%. Don't know what the annual management cost will be but I would expect it to be less than 0.3% maybe even 0.15%.

You'll be able to buy or sell this as you would any share, so buying £3,600 would be the same as buying £3,600 of Vodafone but ETFs don't levy stamp duty at 0.5%. Commissions if you use a discount broker will be in the £8 to £12 range.

Perhaps a better way to keep 100% in cash would be to use the £3,600 to invest in a normal Cash ISA (Scarborough Building Society has one paying 6.3% and is flexible) and then £3,600 in a Stocks & Shares ISA which invests in the ETF.

Another way to use the ETF is if you do want to invest in stocks but not right now (because you don’t like the market) buy the ETF as a holding type trade till stocks (perhaps) offer better value. Correct me if I’m wrong but cash in a stocks & shares ISA usually pay derisory rates of interest.

The ETF is not listed yet, should be in a few months, maybe within a few weeks.

Stay tuned and hope this helps.

Lavendyr · 18 February 2008 at 12:56PM

AlexGreen wrote: »

As you most probably know the ISA rules are changing slightly for this year. The limits are now up to £7,200 but only a maximum of £3,200 in cash, the balance has to go into a 'Stocks & Shares ISA'.

Wrong, it's £3,600 max in a cash ISA.

AlexGreen wrote: »

Deutsche Bank is about to list an ETF (Exchange Traded Fund) that will track the Sterling overnight interest rate which at present pays around 5.3%. Don't know what the annual management cost will be but I would expect it to be less than 0.3% maybe even 0.15%.

Taking the interest down to 5%, at most 5.15% - not exactly a great rate. There are a lot of normal savings accounts out there which pay more than that after tax.

alastair_h · 18 February 2008 at 1:00PM

Alex,

Thanks for info. I think the cash ISA is £3,600 and the stocks and shares the same, upping entitlement from £7k to £7k2 per year.

I was also thinking about Scarborough BS ISA, however there are a few catches, please see link for info when i asked this question
http://forums.moneysavingexpert.com/showthread.html?t=729279

jamesd · 18 February 2008 at 1:09PM

Lavendyr, it's still a useful rate for many that you want to keep in a stocks and shares ISA, since it may be competitive with the after tax rate offered for cash within the iSA. Higher rate tax payers may also benefit, since they would need 8.3% before tax to match this outside a stocks and shares ISA.

It may not be eligible for holding in a stocks and shares ISA anyway, since there are restrictons intended to prevent guaranteed investments that effectively pay interest.

AlexGreen_2 · 18 February 2008 at 2:06PM

Typo re the limits, yes of course they are both £3,600.

Yes Lav there are a lot of other better savings rates but you miss my point, they are all for cash ISAs which you can only pay in a maximum of £3,600 per year. This is why I said use something like the Scarborough BS for your Cash ISA.

But if you want to invest the full £7,200 in pure cash (or almost cash with this ETF) there hasn't really been an option such as this before. And remember this is not a fund managed by Fidelity or one of the other big firms so it's therefore very flexible as it's traded just like a share. Personally I can see this ETF being a big hit with Stocks & Shares ISA accounts if only as a sensible place to park cash while wanting to be out of stocks or waiting for (perhaps) cheaper levels.

JamesD - ETFs are classed as shares so I'm almost certain that this will be allowed, it's not a bond or a guaranteed investment as such. We'll no doubt know more in the future when it's actually listed apparently towards the end of March (ticker is going to be XSTR).

cheerfulcat · 18 February 2008 at 2:30PM

I really doubt that this ETF will be allowed in a stocks and shares ISA - the rules are fairly clear that any investment which is guaranteed to return at least 95% of your capital within five years is disallowed. And AFAIK the guarantee does not need to be explicit.

Reestit_Mutton · 18 February 2008 at 3:39PM

I really doubt that this ETF will be allowed in a stocks and shares ISA - the rules are fairly clear that any investment which is guaranteed to return at least 95% of your capital within five years is disallowed. And AFAIK the guarantee does not need to be explicit.

What about index-linked gilts?
Are ETFs based on these allowed in an ISA?

If so, they might be a useful alternative if your NS&I Index-Linked Cert allowances have been used up?

RM

cheerfulcat · 18 February 2008 at 7:12PM

Reestit_Mutton wrote: »

What about index-linked gilts?
Are ETFs based on these allowed in an ISA?

If so, they might be a useful alternative if your NS&I Index-Linked Cert allowances have been used up?

As the capital is not guaranteed in the index-linked gilt ETF it should be fine but this also means that as a way of holding cash it's pretty useless! The best way IMO to get interest paid tax-free in an ISA is by holding gilts directly - bear in mind that they have to have more than 5 years to run to maturity to be eligible.

Lavendyr · 18 February 2008 at 8:24PM

AlexGreen wrote: »

Yes Lav there are a lot of other better savings rates but you miss my point, they are all for cash ISAs which you can only pay in a maximum of £3,600 per year. This is why I said use something like the Scarborough BS for your Cash ISA.

Actually I meant normal savings accounts, not cash ISAs. For instance Kaupthing Edge instant access pays 6.5% gross which works out at 5.2% net, with the added attraction of being able to access your money without penalty. Though point taken re higher-rate tax payers.

AlexGreen_2 · 18 February 2008 at 8:29PM

CCat, yes but the trouble with Gilts is that they can move down in value so it's always possible to lose capital. The money market ETF will only ever go up in value, it cannot go down, although obviously the rate of return can move lower if interest rates were to fall.

Same with the Index linked Gilt ETF that can down in value as well.

The main point with all of this is that at present there is no way (correct me if I'm wrong anyone) a Stocks & Shares ISA can hold all or part of it in cash AND be paid a decent interest rate. This is what makes this ETF so exciting and perfect for S&S ISAs, assuming of course they're going to allow it. If they don't I think that the government will end up trying to plug holes in the dyke with their fingers as the smart product boys in the City will only ever come up with new products.

cheerfulcat · 18 February 2008 at 8:58PM

Hi, AlexGreen,

CCat, yes but the trouble with Gilts is that they can move down in value so it's always possible to lose capital.

Should have clarified - the way to buy gilts and keep capital secure is to buy at or under the issue price. That way as long as you either don't sell for less than you bought for, or hold the gilt to maturity, you don't lose capital value.

If they don't I think that the government will end up trying to plug holes in the dyke with their fingers as the smart product boys in the City will only ever come up with new products.

Unfortunately, they ( HMRC ) don't have to do anything more than they already have, which was the introduction of the 5% test.

How to hold £7,200 in a 'Cash ISA'

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