This inflexibility is very unhelpful for long-term investors who may want to de-risk their Isa portfolios at times of market uncertainty, such as in recent weeks. But the irreversibility does make you stop and think long and hard if transferring cash to equities is the right thing to do.
The FTSE All-Share is yielding 3.7 per cent and plenty of mainstream equity funds offer higher yields than that with the potential for capital growth, too (you can read about some of them here). However, my colleague Chris Dillow in his analysis of the reader portfolio points out that just because returns on cash are poor, this should not be a determinant in whether to move more of your portfolio into equities. You have to be comfortable with the risks inherent with investing in equities – in other words, can you stomach the potential for your investment to fall 20 per cent or even 50 per cent in value?
So first make sure that your cash Isa is working hard enough on your behalf. Consumer Prices Index inflation has fallen to 2.8 per cent, meaning there are more than 200 savings accounts that offer savers a real return on their money, according to Moneyfacts.
The question is, is your cash Isa in one? To beat CPI inflation and maintain the spending power of your money, a basic-rate taxpayer paying income tax at 20 per cent needs to earn at least 3.5 per cent a year in interest, while a higher rate taxpayer forking out 40 per cent in tax needs an account paying 4.7 per cent. Yet the average no-notice savings account pays just 1.05 per cent, said Moneyfacts.
Out of a total 1,454 savings accounts, the number of accounts that offer savers a real return on their money now stands at 210 - up from 159 last month.
However, just 123 of these inflation-beating accounts are cash Isas, which limit the amount of tax-free money savers can invest to £5,640 a year. And, of the 87 non-Isa accounts that beat inflation, there is not a single variable rate account up for grabs - all are fixed-rate bonds.
But this is still no reason for savers to cheer. Research by HSBC has revealed that long-term fixed rate investors in the UK face a savings precipice when they come to reinvest later this year, as rates for long-term products continue to fall. Over 4.9m fixed-rate products are set to mature later this year, mostly in November. HSBC's findings show that those who invested in fixed-rate products that have matured so far in 2012 will collectively lose £124m in income if they choose to reinvest their savings in similar products.
Long-term bonds are believed to be where most of the loss in income is. The average four-year fixed-rate bond investor will see their income fall by 31 per cent, or an average £1,205, if they re-invest over the same period this year. Despite this, long-term bonds are the place to be for a higher income, with 4.25 per cent on offer for cash Isa holders who want to lock their money up for five years with Halifax. You can see other good options for cash Isa transfers in the table below.
