Just how good value are ISAs?

cjl23

We're both in late fifties, retired early and have built small portfolio of both cash and equity ISAs between us. Have been wondering about investing to new limit but rates look quite low compared to one year bonds. E.G. in most cases paying 20% tax on 1 year bond at 4% looks better return than 1 year ISA at 3% - am I missing something about just how good ISAs are?

Baldur

You are forgetting the ongoing tax-free status of ISAs - in the short-term you may get a better rate or appear to do so (although your example of 4%AER/3.2% net of basic rate tax can be equalled or bettered by a number of Cash ISAs, depending on the amount of Cash ISA funds that you hold).

See this post for current Cash ISA 'best buys'.

I_did_give_a_Barclays

I can give 2 examples of the good and bad about current rates for Isa's. Last year in September I decided to invest in a 3 yr fixed rate ISA @ 6.15% with Nationwide - happy days. This year we received our latest statement from our HSBC instant access ISA. The acount had £18000 in and was only earning £5 a month (£60 a year!!) in interest. I hasten to add this account was only left open whilst dealing with a property purchase and will be closed within the month. This shows the extremes with ISA's over the last 12 months or so when rates plummeted, but you should bear in mind interest rates will eventually increase and once your capital is in it is tax free till the day you withdraw it, on the other hand a couple over 50 can now invest over £10k every year so it is quit easy to rebuild your investment if you withdraw now. At the moment I am not using my ISA allowance because of the poor rates but I do expect to resume once rate start to climb again although I think this may be a couple of years away. As ever look around (on this site maybe) for good rates and compare them to rate for fixed rate bond etc.. then make your decision

dunstonh

Over 65s can benefit quite a lot more from ISAs as the income generated from them does not go towards the age allowance limit. So, the compound effect of utilising your ISAs each yaer as well as growth and income (reinvested) can make a big difference in the long term.

Plus, ISAs investing in fixed interest securities can still claim back the tax taken within them.

Primrose

I think dunstonh makes a very good point about the long term advantages of ISAs for older people which can tend to get overlooked in these days of low interest rates. If you have money which you can gradually lock away for your retirement days, this will build up into a nice tax free nest egg which is not impacted by the age allowance limit once you reach 65. Also, nobody knows what the tax rates are going to be in a few years time, but in the light of the current economy you can bet they won't be going downwards, so a combination of circumstances combine to work in favour of ISAs. There are still reasonable interest rates available on longer fixed term ISAs if you check around. I still believe that in the long term, a lower interest paying tax-free ISA is better than a taxable cash savings account of any kind. As your annual investment in it builds up, so does the amount of savings you protect from tax. Over ten years, with both of you using ISAs, this can amount of a considerable tax free sum.

Rollinghome

Perhaps worth noting the age allowance trap affects those with retirement incomes specifically between around £23,000 and £29,000 and then assumes that income can't be arranged between spouses to avoid it and that there isn't any use of the CGT allowance. Otherwise the retirement income for a couple could be double those figures or more without being affected.

Whether you should pay into a cash ISA rather than a better paying non-ISA depend on your rate of saving. The point to remember is that the allowance can't be carried forward. But that assumes you can save up to the ISA maximum every year.

If you can't do that then it's possible you might be better putting your money in a better non-ISA this year with the intention of moving it to an ISA at a later date. So some might need to do the sums involved.

Example would be if you could only save a total of £5100 before April 2011. You might want to wait and open your ISA with your £5100 just before then while grabbing the best rate you can in the meantime.