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For market-savvy investors looking to adjust their tax-free Nisa (new Isa) savings, this week’s stock market leaps could make stocks and shares look like the obvious choice. The FTSE 100 hit a 14-year high amid hopes of greater economic stability in the eurozone, lending equity investment even greater cachet than before.
Confidence in the stock market has already been pushing Isa holders away from cash investments, despite the new regulations which allow investors to put all their Isa savings — up to £15,000 a year — into cash. Previously you had to split Isa savings between cash and stocks and shares.
Figures show that the amount of money being subscribed annually into cash Isas fell from £40.9 billion to £38.8 billion last year, while annual inflows into stocks and shares Isas rose from £16.5 billion to £18.4 billion.
Why choose a two-year fixed-rate Isa offering a paltry two per cent return when you could be looking at far more for a stocks and shares Isa? According to research by the adviser Hargeaves Lansdown, at five years the probability of shares outperforming cash is 75 per cent, at 10 years it is 90 per cent and at 18 years it is 99 per cent.
However, financial advisers also point out that for short-term investments cash is often preferable because it is less volatile. They say that this week’s stock market movement may illustrate the unpredictable nature of equity investment, driving more conservative borrowers back to cash Isas in the hope that rising Bank of England base rates will prompt more attractive rates.
Many expect the base rate to rise from 0.5 per cent early next year. “Cash Isas may have lower returns than stocks and shares Isas, however the risk involved [with stocks and shares Isas] could mean you end up with nothing and even losing a proportion of your investment,” says Charlotte Nelson, of Moneyfacts. In 2009, when the stock market plummeted during the recession, research showed that £70,000 invested over the course of the previous decade would be worth just £61,744.
Many of the best cash Isas on offer are fixed, so you can’t add anything in for the term you agree to. Newcastle Building Society has one of the best — a five-year fix at 2.85 per cent — and Virgin Money offers a five-year fix at 2.8 per cent. However, if you don’t want to lock your savings away for quite so long you could consider a two-year fix at Barclays Bank or AA, both at 2 per cent. Rates on variable cash Isas are generally worse but could improve in line with a base rate rise. One of the best is an instant access cash Isa at Coventry Building Society at two per cent.
“It is important to hold some cash, just not too much,” says Danny Cox, of Hargreaves Lansdown. “The problem with cash is that its spending power reduces over time due to inflation.”
The typical investor holds a quarter of their money in cash, providing an emergency fund if anything goes wrong.
Nisas were launched on July 1. Everyone can now put £15,000 each year into cash or shares savings without paying tax on it.
Whether you should opt for fixed or variable, cash or shares, depends on whether you need instant access to your money.
Long-term shares outperform cash (especially given that inflation reduces the value of cash savings), but what happens if the stock market crashes?
Try five-year fixed cash Isas at Newcastle Building Society at 2.85 per cent or 2.8 per cent at Virgin Money, or a two-year fix at Barclays Bank or AA, both at 2 per cent.
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