Cash ISA/Savings/Inflation - Query

ssm90

Good Afternoon,
Please could someone help me with the following query, I understand the basics and have tried to find further info online but with no success. It might just be a case of confirming what I think or correcting me if I am wrong.

Let's assume in this scenario I have £100k (so over the £85k amount that is protected by FSCS) worth of ISA savings from previous years. And lets assume I have yet to deposit my £20k into ISA for this year too. The £100k sitting in from previous years is currently getting 0.8% PA. The best rate offered this year for a 1 Year fixed is 1.3% offered by Post Office Money (as far as my research has shown), therefore it would make sense to transfer the £100k to get that extra 0.5%.

Here are my questions:
1- Can I add the £20k to the £100k and then transfer it all to Post Office Money? Or will that not work? Is the alternative to open a £20k ISA with Post Office and then transfer the £100k in after? 
2- Regardless of which order I did it in, is there way to split the now £120k, into smaller amounts to avail of the FSCS protection? So in this case, I would have require two separate ISAs. Additionally, can these 2 separate ISAs be in 2 separate providers or does it all have to be with Post Office?
3- From what I gather, the current inflation rate is 1.7% which is clearly much higher than the interest rates provided from ISAs. So, the money would still be losing purchasing power, is there any way at all to avoid this erosion from inflation? Assume, stocks and shares are too risky.
4- Leading from the point above, if there are other avenues that offer better rates such as Savings accounts for example, I assume I would lose the tax benefits of the ISA if I withdraw it to put it into the savers account.

Essentially, the overall theme is, is there a way to preserve the purchasing power of all the money in the Cash ISAs without having to transfer it to a stocks and shares ISA?

Thanks in advance.

YellowStarling

1. Yes, you can complete an ISA transfer at any point (though beware not all providers accept transfers; others accept only full and not partial.  Post Office Online 21 (fixed for 1 yr @ 1.30%) does accept transfers so this caution is moot for you!).  If you're transferring for a better rate, it would make sense to transfer early and then contribute following that (for full transfers, the transfer itself can then take with it any remaining interest and close the account in one fell swoop).
2. Yes, though you can only contribute new money into one ISA of its type each tax year. E.g. You split your £100k into two transfers to A and B cash ISAs, sending £50k into each for argument's sake.  You can then contribute a further £20k this tax year, but only to one of A or B.  If A was a cash ISA, and B was another type of ISA (e.g. S&S, LISA, etc.) then you could theoretically spread your £20k allowance this year across both.  NOTE: some providers vary in their T&Cs about partial transfers, being able to contribute new money once transferred, etc. - linked to #1 above, so research the T&Cs of the providers first.
4. Yes, withdrawing monies out of the ISA (not as part of a transfer) would then mean that amount loses its ISA tax status.

3/last question. MSE is full of best buy comparisons, account type comparisons, and has threads dedicated to each type too.  To keep the ISA shelter of the funds though, you're probably going to be looking at tying your money away for longer for the higher rates (which then runs the risk that inflation increases further in the meantime) or investing it - there is a range of investments in S&S that suit the various risk appetites and, subject to the T&Cs mentioned in #1 and #2 above, you could likely move only part of your cash ISA holdings and not all of it if you wanted to keep some relatively liquid.  To finish this particular answer off though, as always these forums and the regulars that are far more knowledgeable than me are a super rich resource, but DYOR and consider seeking professional independent advice too.

Albermarle

Essentially, the overall theme is, is there a way to preserve the purchasing power of all the money in the Cash ISAs without having to transfer it to a stocks and shares ISA?

Normally to beat inflation you have to take some risks. Maybe with inflation dropping this might not apply for a few months but usually this is always the case.

You might want to do some research into the customer service /general admin of Post Office Savings …….

ssm90

Thanks for your response YellowStarling.
So it pretty much ties in with what I thought. If I am not comfortable with any of the S&S risks, then my best course of action is damage limitation by getting as close to inflation rates as possible.

I do take your point with regards to entering into a longer fixed term ISA savings, however, the would then mean having the money tied up for longer and as you rightly mentioned potentially losing out to further increase in inflation. I could also lose out on increasing rates offered by ISA providers next year.

ssm90

Albermarle said:

Essentially, the overall theme is, is there a way to preserve the purchasing power of all the money in the Cash ISAs without having to transfer it to a stocks and shares ISA?

Normally to beat inflation you have to take some risks. Maybe with inflation dropping this might not apply for a few months but usually this is always the case.

You might want to do some research into the customer service /general admin of Post Office Savings …….

Thanks for your response Albermarle.
What if I don't want to beat inflation, but just keep close to it so I preserve the value rather than make a gain or loss.
So for example, index-linked gilts, would this not be ideal to buy to maintain the 'real' value of the money? As opposed to say entering a fixed rate. (I am also making the assumption here that I can purchase these on the S&S ISA market).

Linton

ssm90 said:

Albermarle said:

Essentially, the overall theme is, is there a way to preserve the purchasing power of all the money in the Cash ISAs without having to transfer it to a stocks and shares ISA?

Normally to beat inflation you have to take some risks. Maybe with inflation dropping this might not apply for a few months but usually this is always the case.

You might want to do some research into the customer service /general admin of Post Office Savings …….

Thanks for your response Albermarle.
What if I don't want to beat inflation, but just keep close to it so I preserve the value rather than make a gain or loss.
So for example, index-linked gilts, would this not be ideal to buy to maintain the 'real' value of the money? As opposed to say entering a fixed rate. (I am also making the assumption here that I can purchase these on the S&S ISA market).

Sadly one thing that index linked gilts do not do, at least for the small private investor, is to match inflation.  Gilts were issued at a value of £100 to give a small return and the guarantee that the capital value would match inflation at maturity.  But once a gilt has been issued it is then traded on the markets, and since many people want Index Linked Gilts the price in recent years has gone well above what is required to match inflation.  When the gilt matures the inflation matching is only against the original £100 value, not the much higher value at which a private investor now has to pay to buy the gilt.

There is no way of matching inflation that does not involve some risk, which basically gives little choice other than S&S.

John464

ssm90 said:

Albermarle said:

Essentially, the overall theme is, is there a way to preserve the purchasing power of all the money in the Cash ISAs without having to transfer it to a stocks and shares ISA?

Normally to beat inflation you have to take some risks. Maybe with inflation dropping this might not apply for a few months but usually this is always the case.

You might want to do some research into the customer service /general admin of Post Office Savings …….

Thanks for your response Albermarle.
What if I don't want to beat inflation, but just keep close to it so I preserve the value rather than make a gain or loss.
So for example, index-linked gilts, would this not be ideal to buy to maintain the 'real' value of the money? As opposed to say entering a fixed rate. (I am also making the assumption here that I can purchase these on the S&S ISA market).

You can only buy index linked gilts at a premium now
For example to have £1 index linked would cost you £1.20
(over simplification, but you see what I mean)

ssm90

Is there no way of buying 'new' gilts? Or are these no longer being issued?
I do find it strange that the only option to keep up with/beat inflation is S&S, especially when it is so volatile. I imagine most risk averse people just accept that they will lose some value due to inflation rather than risk it on S&S.

eskbanker

ssm90 said:

I imagine most risk averse people just accept that they will lose some value due to inflation rather than risk it on S&S.

Perhaps a generalisation but I imagine that most people referring to themselves as risk averse probably don't really understand risk!  It's a common misconception that putting money in capital-protected deposit accounts is a risk-free activity, in that, as you accept, doing so entails inflation risk, but that seems more palatable to many than investment risk....

Audaxer

ssm90 said:

I do find it strange that the only option to keep up with/beat inflation is S&S, especially when it is so volatile. I imagine most risk averse people just accept that they will lose some value due to inflation rather than risk it on S&S.

You are not guaranteed to match or beat inflation if the money is invested, especially when markets are so volatile. But if you are investing for the long term, i.e. at least 10 years, there is a very good chance you will beat inflation with a balanced investment fund or portfolio. If you are likely to need access to the money in the short term, it is best to keep it in cash savings at the best rate you can get. 

masonic

ssm90 said:

3- From what I gather, the current inflation rate is 1.7% which is clearly much higher than the interest rates provided from ISAs.

The current rate of inflation is unknown. Between February 2019 and February 2020 it was 1.7% and there were fixed-term savings accounts available that paid more than that. Between March 2019 and March 2020 it was 1.5% and it could be lower between now and April 2021.

When you save your money in a bank account, with the expectation of your capital and interest being guaranteed, there are limits to what can be done with that money to generate an income. Inflation is a form of stealth taxation. You can't hope to escape its effects completely without taking on some risk.