ISA deadline day 5th April - is fast approaching and, with interest rates desperately failing to keep pace with inflation since 2008, there is speculation that many people will be shunning cash ISAs in search of the highest returns they can find from a stocks and shares ISA.
The average interest rate on cash ISAs stood at a meagre 1.18% at the start of March 2014, according to Bank of England figures. That's well below inflation, which has been riding high above the Bank's target of 2% for much of the last five years, meaning savers have effectively seen the value of their hard-earned money fall in real terms.
Nick Hungerford, founder and CEO of online investment manager Nutmeg, believes we're about to see a significant swing from cash ISAs to stocks and shares ISAs.
At this time of year, with the 5th April ISA deadline firmly in view, we normally see a bombardment of special rate deals for £5,760 cash ISAs from the high street banks. Such deals have failed to emerge. With interest rates so low, it's very difficult for the banks to offer good rates to savers. What's more, stocks and shares ISAs are no longer perceived as complicated and only preserved for the super-rich. I predict many people will switch from cash to the higher £11,520 allowance of stocks and shares ISAs during this ISA season - and the benefits they'll experience will keep them there.
So where does that leave anyone looking to find the best returns from an ISA, or exploring investment ISAs for the first time? There are plenty of ‘do-it-yourself' platforms out there where you buy access to them and have the opportunity to invest in one or more of the funds they recommend. But how do you know what funds or individual shares will perform best? Just picking from a short list of suggested funds, or buying into particular stocks and shares someone has suggested to you, can put you on very dangerous ground, says Hungerford.
Having all your eggs in one basket like that is incredibly risky. Intelligent investing means spreading and managing your risk by making sure your money is in a wide range of different investment types shares, bonds, commodities, and so on across many geographies and industry sectors. That way, when financial markets go down, you can reduce the impact of any losses, and when there are gains, your money is spread in order to take advantage of more areas enjoying good returns.
Getting a complete, diversified portfolio like that, fully managed by an investment team, is not something that comes easily unless you have a lot of money to invest. Or is it? Recent regulatory changes in the investment industry have led to the emergence of companies like Nutmeg who can offer this kind of high-end service at low cost by taking advantage of the efficiencies and powerful tooling that digital technology gives you.
It's been changing for a while now, continues Hungerford, especially in the US, where the investment industry is, in many ways, more advanced than in the UK. It's a digital industry these days. The era of face-to-face relationships is dying out because it costs money to maintain those stately Mayfair offices and take big clients out on expensive golf days. That has to be paid for and it's the investor, the customer, the stocks and shares ISA holder, who ends up paying for it in inflated fees and sneaky charges.
At Nutmeg, we build, constantly monitor and fully manage ISA portfolios for our customers that are tailored to their goals and financial profile. That kind of service, traditionally only available to those with many thousands of pounds, is now accessible to the majority. You can start an ISA portfolio with us for just £1,000 plus, £50 monthly contributions for accounts less than £5,000.
The crucial question remains, however: What kind of returns can you get from having a diversified portfolio?
Our medium-risk portfolio delivered returns of 14.5% in 2013, after fees, says Hungerford. Our high-risk profile fared even better, up 20.6% over those 12 months. Our low-risk portfolio was also incredibly strong when compared to the kind of interest rates you can get on a cash ISA, returning 7.8% last year.
Given that interest rates have remained so low for so long in fact, the five-year stagnation we're currently experiencing is unprecedented since the post-war recovery period of the 1940s and 1950s it's no surprise that the British public may finally be feeling the pinch as the cost of living far outstrips their capacity to save. That was perhaps the driving force behind the Government's recent announcement that they'll be revamping ISAs from 1st July, giving people more flexibility to switch between cash and stocks and shares ISAs, and increasing the total annual allowance to £15,000.
The views and opinions expressed herein are for informational purposes only. They are subject to change without notice, and do not take into account the specific investment objectives, financial situation or individual needs of any particular person. They are not personal recommendations and should not be regarded as solicitations or offers to buy or sell any of the securities or instruments mentioned. The views are based on public information that Nutmeg considers reliable but does not represent that the information contained herein is accurate or complete.
With investment comes risk. The price and value of investments mentioned and income arising from them may fluctuate and you may get back less than you invest. A movement in exchange rates may have a separate effect, unfavourable as well as favourable, on the gain or loss otherwise experienced on the investment concerned. Past performance is not an indicator of future results, and future returns are not guaranteed. We acknowledge an individual's tax situation is unique and tax legislation may be subject to change in the future.
A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.
Nutmeg past performance simulated, based on real market transactions implemented across all individual customer portfolios to a single portfolio for each risk level. Past performance is not an indicator of future results, and future returns are not guaranteed.