To save or not to save this year?
Banks don't seem to want cash and rules are changing, says Neasa MacErlean
Friday 08 February 2013
Should you invest in an ISA this year? And, if so, what kind? About half the UK population is probably mulling over these questions and millions of us will make some kind of saving before the financial year closes at midnight on 5 April. But many potential savers and investors will be a bit hesitant because conditions have changed over the past 12 months and there are now fewer organisations giving advice.
Apart from the obvious issue as to whether individuals can afford to put money away – up to £11,280 this year – the market has changed. Far fewer people are expected to invest in bonds this season and more are likely to go into equities, including emerging market stocks.
Savers planning to go into a cash ISA might be hoping for some attractive last-minute deals, but they could be disappointed as the banks do not seem particularly eager to compete for ISA deposits.
Some players are expecting a fairly healthy market in the peak season, which usually runs from about now to the end of March. "The stock market is pushing ahead, and there is less bad news around the economy and Europe," says Danny Cox, head of advice at Hargreaves Lansdown, provider of the low-cost Vantage platform for holding ISAs.
Fidelity, the largest provider of equity ISAs in the UK, says that ISA sales increased by nearly two thirds (63 per cent) in the first half of January, compared with a year before.
Meanwhile, Kevin Mountford at MoneySupermarket.com, suspects that the cash ISA market in particular could be less than spectacular this time around: "I wonder if the powers that be want to see us saving at the moment or if they would prefer us to put our hands in our pockets and go out spending on the high street?"
Slightly more than half of the money put into individual savings accounts goes into Cash ISAs rather than equity ISAs. This is the right approach, as anyone with a small amount of savings should keep them easily accessible in cash rather than risking them on the stock and bond markets, where prices can fluctuate dramatically.
But Mr Mountford believes savers who wait for attractive rates to emerge, notably higher than the top rates of 2.5 per cent now in the market, could be disappointed. "Some of the banks don't need the inflows now that they needed in the past," he says. Lending less than they used to, the banks are less dependent on attracting large sums in from savers.
Among investors in equity and bond ISAs, a move from bonds to equities is expected to be "the dominant theme" of this year, according to Fidelity's investment director Tom Stevenson. Experts agree that far more investors will put some of their funds into emerging markets and other riskier homes this season.
"Private investors have not been sticking to the safe options," says Keith Evins of JPMorgan Asset Management, speaking of users of their platform. "The preponderance of Asian, Latin American and global emerging markets funds suggests investors are willing to take on a bit more risk in the search for above-inflation returns."
BlackRock, a leading fund manager, is particularly pushing its Frontiers Investment Trust this year, believing that Vietnam and Bangladesh will be among "the world's fastest-growing economies". Ben Yearsley of Charles Stanley, another ISA platform provider, expects to see more ordinary investors becoming sophisticated enough that they look for niches within emerging markets. "It's not just emerging markets but frontier emerging markets," he says.
United States funds have been top of the best performance tables recently but advisers are not expecting those figures to draw many ISA investors across the Atlantic.
Six of the top ten performing funds in January were US funds, according to Lipper.
But Mr Cox says: "It's quite difficult to find funds that consistently add value over the long term. In part this may be due to the US market being larger and more efficient than other world stock markets."
He does, however, point to two funds he would favour, Legg Mason US Equity and BlackRock North American Equity Tracker.
Income funds will be another sector in demand this season. "With base rates at 0.5 per cent, equities will be a focus this year," says Tom Stevenson of Fidelity. "Early signs are that UK and global equity income funds will be big sellers," says Darius McDermott, managing director of Chelsea Financial Services. He predicts that three funds in particular, Trojan Income, M&G Global Dividend and Newton Global Higher Income, will prove popular with investors.
In years gone by, fund managers have often unveiled new launches in the run-up to April 5 but few managers seem confident of raising sufficient funds in the current climate to make such an expensive step worthwhile.
The 2010 launch of Fidelity China Special Situations, managed by the near-legendary Anthony Bolton, may have served as a lesson to other investment houses as the unit price sank five months after the launch and has yet to regain its initial level.
However, there is at least one launch for the current season, the Matthews China Dividend Fund. But investors do not lack choice. There are, for instance, 2,500 funds offered on the Hargreaves Lansdown platform.
Following major changes in the financial services sector on 1 January, financial advisers now have to be paid in fees rather than taking an automatic percentage commission. This has meant a reduction in the number of advisers. So more investors will probably be using free research sites on the internet.
Investors can also put in up to £3,600 every financial year in cash and/or stocks and shares for children under the age of 18.
But Mr Mountford does not expect exceptional activity on these so-called Junior ISAs this year. "Most ISA investment comes from older and more affluent savers," he says. "For young families it's a bit more difficult. Have people got the money to save for their kids when they haven't got the means to save for themselves?"
One other trend that firms are noticing is a growth in people who invest monthly rather than making one lump sum investment in March.
At Hargreaves Lansdown, the proportion of monthly investors has risen from 16 per cent five years ago to 28 per cent today. This is partly because the allowance has risen so much and will rise further to £11,520 for the 2013/14 financial year. Someone putting in the maximum next year will still have to pay in £960 every month if they spread it out.
Despite the difficulties of the current economic climate, the ISA has gone down well with the public.
There are many people (see case study) who see their ISA as a morale booster, a fund which can help them through difficult times and give them more freedom than other kinds of investment.
"ISAs have been a phenomenal success story," says Mr Cox. "People understand the benefits of using ISAs and their take-up illustrates h
An early starter who can now reap the benefits
Liam feels almost affectionately towards his ISA. "I'm very pleased with the way it has worked out," says the political campaigner. He immediately saw the potential of the personal equity plans, the predecessors to individual savings accounts, when they were introduced in 1987. Since then Liam (not his real name) has tried to invest as much as possible each year.
Now in his early 60s, Liam will probably stop paying in within a couple of years and start living on the income. His ISA saving has doubled as rainy-day money and as a pension plan. Because he has invested mainly in equities, he expects the return in the form of dividends to keep rising. So he sees his ISA as "in essence, like an income-increasing annuity and it's tax-free". He does also have a self-invested pension plan but he prefers the ISA. Like other types of pension, the SIPP produces income in retirement which is potentially taxable.
However, the ISA, which did not benefit from tax relief on the way in, is essentially tax free when the income is drawn.
Liam likes the flexibility of the ISA. He could have taken income or capital from his ISA at any time. With pensions there are restrictions for most people on withdrawals before the age of 55.
Mark Dampier: 'We're on our own in retirement. They've pulled pensions to pieces'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
Crippling PFI deals leave Britain £222bn in debt
Pension freedoms: How to deal with cold calls from scammers
Barclays new Blue Rewards hands cash to customers. What’s the catch?
- 1 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 2 Ben Affleck asked TV chiefs to hide slave-owning ancestry, new hacked Sony emails published by Wikileaks claim
- 3 Driving while dehydrated can be just as dangerous as drink driving, study suggests
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
- 5 One Direction: Louis Tomlinson launching his own record label, has already 'signed two acts'
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...
Day In a Page
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000