Cash ISAs? Do me a favour, only for high rate tax payers

[Deleted User]

CASH is certainly king at the moment - chances are it will remain king during 2008 the way things are going on the markets. There are numerous reasons why cash isa's are so popular, & only a fool would ignore them completely.

To imply that everyone should put their whole annual isa allowance into s&s, every year, is ridiculous in my opinion - It's all about balance.

This thread was obviously created to provoke; and I guess it's worked - Congratulations!:rolleyes: :T

Perhaps the OP is bitter about cash isa's, because he's put his full annual isa allowance in s&s over the years, and he's not done too well....:rotfl:

Sapphire

S & s ISAs – and other relatively high-risk investments – are also not for those who will need the money in the near future. Used in the short term, they are a form of gambling through which a person could lose heavily.

I would only risk investing in s & s if I had a surplus of money that I could afford to lose.

Han_naH

Nigel was a little negative there - I know about the rule changes next year, but that's a one-way transaction. No point in keeping it in the cash ISA then transferring, you should be buying units now and collect in the upswing.
Same for the poster suggesting cash is king - of course it isn't. I agree with him about market conditions, but that means cheap shares = greater gains = collect in the upswing.

Also a few posters here have failed to grasp the need for regular drip-feed investment in the stock market. This means you are less exposed to peaks and troughs and instead enjoy an average throughout the year (pound cost averaging). Perhaps some of you thought: one drops 7K into a FTSE tracker once per year on April 6th? Now that would be a little silly.

Aeging, of course every basic rate payer would be better off with all the 7K in S&S, as any upswings in the shares price/s can be large. Like that guy wrote - M&A (takeovers) etc. Add on reinvestment of divis and after 10 years for example, you are well beyond your capital gains allowance should you need the money. You're not taxed when you press collect. I re-iterate, the figures for S&S are much bigger and the tax savings ditto.

I make no argument against holding cash - but just take the highest rate savings accounts, and forget about cash ISAs, to keep your 7K S&S allowance.

Meester, 6% returns not bad? If real inflation is 10%, you lose 4% a year? Fantastic.

You know, this country has a savings rate problem (0%, down from something like 5% in 1980) and a pension crisis. Hence the Govt is supposed to be encouraging long term investments with proper growth, and that doesn't include cash ISAs I'm afraid.
Why do you think pension funds put all their money in the markets? Because their pensioners would be very angry when they find the pension company stuck it all in a deposit at a few % a year. It would never buy a decent pension or anywhere near it!

And lastly, regarding long term interest rates I suggest history is no guide to the future, and here's why.

(1)The pound is free floating against other currencies (certainly since the ERM nonsense of 1992) which means as exports climb so does the value of the currency (prices) thus inhibiting exports without the need to raise interest rates. It was claimed recently that this has reduced the long term base rate by 1%.

(2)The independant Bank of England conducts base rate policy based on economic and not political needs as of 1997, leading to price stability and lower long term rates.

(3)We have free movement of trade across the world and across Europe since 1992, meaning price transparency (greater competition) giving subdued manufacturing and retail prices, thus lower inflation and lower int. rates.

(4)Free movement of labour across Europe in particular means lower labour costs (economic migrants will and often do work for less) and lower wage demands = low inflation = lower long term rates.

These are all relatively recent factors.

Remember folks - low interest rates = climbing stock markets = poor savings account returns. :T

cheerfulcat

Aegis wrote: »

Now, if you wanted to talk about appropriate amounts of cash savings, then we could get a decent conversation going here. However, the initial post appeared to be just a claim that cash ISAs are completely useless, which is most definitely not the case.

Aegis, I didn't read it that way at all. The OP said

So why on earth does the savings page on MSE put the cash ISA line in big lights at the top of the page, when what really matters is the best standard savings accounts, and that stocks and shares ISAs are the way forward for most people

which, to me, translates as " the S&S ISA is more valuable than the cash ISA, so why not emphasise this".

Aegis wrote: »

Build up £15-30k in cash ISAs, and I'd say that there's no point in building up any more, but keeping half a year's salary is useful, and cash ISAs are very useful for storing that money.

This implies that the cash is for emergency use - in which case if you need the cash you have lost the tax shelter forever. Keeping your emergency cash in an ordinary savings account and using the S&S ISA allowance to the max ( assuming that one has that amount spare ) surely makes sense?

As I mentioned above, if you were looking at investing £7k total, then you would need to be looking at returns of about 470% before you start losing out by going into a cash ISA with £3k. Admittedly, that would only take about 5 years if you got 25% increases each year, but you'd also be able to sell, say, £10000 of your outside-ISA portfolio plus as much as you like from inside the ISA, so it's still not a totally black and white situation

25% p/a gains are not unknown. And what about the other £28,000 you might have invested over those 5 years? The £9,200 ( current year ) exemption starts to look pretty weedy...

True, but you'd also expect any prepared investor to want a decent cash pot before going in to the markets. As I've argued at several points in this thread, the cash ISA is ideal for the medium-long term rainy-day savings.

But the OP didn't say " don't hold cash ", only " cash is better held outside an ISA, saving the ISA allowance for equities " ( paraphrase ). And I have to say that I agree with this thinking, assuming that one has the money to do both.

dipsomaniac

the new isa rules coming into force 6 april are a good 'get out of jail' card for many isa savers. being able to transfer to s&s is a good move, trying to time the market though is not easy.

i don't think anyone has mentioned corporate bonds. s&s isa's did become slightly less attractive to basic rate tax payers when brown stopped isa managers from reclaiming the 10% tax credit. however, income from corporate bonds was not affected as the income is classed as interest, still benefit from the 20% tax credit and are more suitable for risk averse investors.

currently the most tax efficient way to provide an income when you decide to retire/reduce your working hours is through pension and s&s isa wrappers. when there are other tax free ways to hold cash i can't see the point in reducing your isa s&s allowance by holding a cash isa. they are also not ideal places for people to be holding emergency funds as any funds withdrawn reduces the amount you can put back in.

i am looking at isa wrappers as a long term investment and there are benefits for a few short term savers (a young person saving for a house deposit) but i believe a lot of people are not using isa's to their best advantage and over-estimate the benefits of a cash isa.

MrMicawber_2

Fantastic thread. Surely much is to do with 1)age and 2)what you are able to save and 3)how soon you need the money back. If you are young and can maximise your S&S contributions then that seems the sensible course of action. I have put what I can put by into S&S ISA's rather than cash ISA's so far but this year for the first time I have also taken out a cash ISA, because I will need it short term and cannot maximise the S&S contribution anyway.

As you approach retirement or any other time when you will need less volatility and a steady income stream it surely makes sense to reduce your exposure to equities and a higher percentage will be in cash (as well as bonds).

So, it is 'horses for courses'.

If I 'needed' to put money into cash I would much rather put it into a cash ISA than a non cash ISA and avoid giving my earnings back to the exchequer in perpetuity. And some of the useful posts above show that the long term difference between cash ISA and normal savings is far from trivial.

However where there is no 'need' to put money into cash, apart from emergency funds, and you can put more than 3k into S&S ISA's then that would seem the long term thing to do.

Leaving aside the logical approach some people would never sleep if they had any money in S&S ISA's. Whether they are right or wrong doesn't really matter, it's just a fact, and it would be better for these folk to have their savings in cash ISA's and/or of cource NS&I indexed linked certificates.

xiox

I don't think S&S ISAs are sensible for everyone. I'm saving towards buying a house (maybe I can get one-mortgage free after HPC :-) ). I had a S&S ISA, but decided to cash it in seeing I couldn't face waiting to recover from 20 or 30% falls. If I had a house, investing in S&S might make sense. But it might make even more sense paying off the mortgage.

Aegis

cheerfulcat wrote: »

Aegis, I didn't read it that way at all. The OP said
which, to me, translates as " the S&S ISA is more valuable than the cash ISA, so why not emphasise this".

Like I said, I don't think it's anywhere near as black and white as that. If in each year you invested a total of £10k (under the current system, let's ignore next year for the moment), you could be investing £4k into a stocks and shares ISA, £3k into a cash mini ISA and £3k into stocks and shares outside the ISA wrapper. Now, if you were looking at how to distribute your funds, you would obviously be clever about this and put your low risk funds outside the ISA wrapper to minimise the CGT payable on any growth you get there.

For example, in 10 years the UK Equity income sector has produced a best performer of +200% growth in the Invesco Perpetual Income OEIC. If I were trying to make a prediction, I'd estimate based on that that we would be looking at somewhere in the region of 8-12 more years before that magic 470% growth was even an issue. Chances are that in that time the investor is going to be making a lot of changes as more appropriate funds become available, and if they're, say, changing their investments after every 5-10 year period for every £3k investment outside their ISA, then they will never incur the CGT on sale of those assets because they won't hold them for long enough to build up a chargeable gain that exceeds their allowance for the year.

Using my example above, most basic rate taxpayers would see next to no benefit in using a stocks and shares ISA for at least 20 years, while they would see an immediate ongoing benefit from using a cash ISA instead.

This implies that the cash is for emergency use - in which case if you need the cash you have lost the tax shelter forever. Keeping your emergency cash in an ordinary savings account and using the S&S ISA allowance to the max ( assuming that one has that amount spare ) surely makes sense?

It makes sense, but it makes more sense to me to use the cash ISA. The idea of emergency money is that if all goes according to plan, it won't be touched. The cash ISA is therefore ideal for saving up such lump sums from my perspective, especially if people use the strategy I mentioned above.

25% p/a gains are not unknown. And what about the other £28,000 you might have invested over those 5 years? The £9,200 ( current year ) exemption starts to look pretty weedy...

I'd suggest at this point that there are comparatively few basic rate taxpayer who are unlikely to become higher rate taxpayers (the main subjects of this thread) who would be able to save up £28000 over 5 years. If you look at it on a rolling basis with your low risk investments outside the ISA and your high risk investments inside the ISA, then being able to sell off £9200+ of the low risk and as much of the high risk as needed every year is probably sufficient for most people!

But the OP didn't say " don't hold cash ", only " cash is better held outside an ISA, saving the ISA allowance for equities " ( paraphrase ). And I have to say that I agree with this thinking, assuming that one has the money to do both.

He very much suggested not holding cash:

And read Rich Dad Poor Dad, you won't touch savings accounts again...

If that doesn't suggest that he's anti-cash, I don't know what would!

Han_naH

Aeging, I never suggested not holding cash.

I suggested deposits which are not cash ISAs.

MargaretClare, I would recommend an S&S ISA which invests in an index tracker - like the FTSE All-Share of 900 companies (not so banking heavy). I don't recommend you buy individual shares, which would be too volatile for the amateur investor. An index tracker spreads your risk nicely and is proven to out perform 90% (or similar) of managed funds.

For people who don't see the difference between cash ISAs and S&S ISA growth, well see this graph:

http://www.nationwide.co.uk/NR/rdonlyres/A7CAF2C2-F207-4D05-A9E0-8BB6DC112368/0/historically_greater_return.gif

And that's just the last 10 years with the dot com crash and 9/11 thrown in for good measure, and still the return is double. :T

CannyJock

MrMicawber wrote: »

Margaret - this is going a bit from one extreme to the other. Equity ISA's can be very worrying when things aren't going well, but they should be a minimum 5 and more like 10 year investment. Over 5 & 10 years they have done pretty well. If you look back at the 1987 crash it hardly registers on the graphs now.

Both Cash and Equity are excellent in their place. Whether cash ISA's come first followed by equity ISA's would depend on what your objectives are & timescale etc etc.

But if Equity ISA's simply worry you to death then they probably are'nt for you.

But do you need to make contuining payments into them to get your money back from the ongoing purchase of shares at low prices or is it suitable for "lump sum" investors?