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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Questions of Cash: Bupa costs bore no relation to what I'd been quoted
Bargain Hunter: Getting your hands on these baby goodies is child's play
Problem gambling: Amid heavy advertising and a surge in remote sports betting, more and more 16 to 24-year-olds are now seen as 'at risk'
The Cyprus dream becomes a nightmare
Plans to tackle fuel poverty are slammed by campaigners
- 1 Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
- 2 The secret report that helps Israelis to hide facts
- 3 Danish TV reporter is all business up top, all party down below
- 4 Ross Burden dead: MasterChef and Ready Steady Cook star, dies aged 45
- 5 Businessman charged £75 for three small bottles of water in London hotel
The secret report that helps Israelis to hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Opponents of Israel's military operation in Gaza are the real enemies of Middle Eastern peace
iJobs Money & Business
Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)
£350 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...
£500 - £560 per day: Orgtel: Java Developer FX - Banking - London - Up to £560...
£350 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...
£26000 - £30000 per annum + Benefits: Ashdown Group: Account Manager - (Produc...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000