Page last updated at 16:39 GMT, Wednesday, 11 November 2009

Individual savings accounts: Your questions answered

Adrian Lowcock
Adrian Lowcock of Bestinvest

Millions of savers have amassed a total of £169bn in cash individual savings accounts (Isas).

So when we asked you last week to "ask the expert" about savings and investments, many of you asked about managing your money in these highly popular policies.

This week Adrian Lowcock of financial advisers Bestinvest answers these queries, and next week he will look at some of the questions you submitted on other aspects of saving and investment.

Q1. What is the cash Isa with the best interest rate at the moment? I am with the Halifax and it is paying me only 0.5%.Keith Hockley, Windsor.

According to you can get a five-year fixed rate Isa from Leeds Building Society offering 4.6%. However, I feel this term is too long and would recommend a shorter fixed bond.

The Principality Building Society offers 4.2% for three years and will also accept transfers. That is more than eight times more than you are currently earning.

Q2. Having already filled this year's Isa I am looking for somewhere else to put my savings. The best rates available require you to sign up to fixed interest rates for anything up to three or four years. If rates increase in the future will I find myself tied into accounts that no longer offer competitive rates? Tom, Oxford.

National Savings & Investments (NS&I) offer a one-year fixed bond at 3.85% gross which is taxable. The number of other one- and two-year bonds has dried up at present and I would suggest fixing for three years, being the minimum available at present, although you may prefer to hold off and see if some good two-year rates become available.

Alternatively you could use your stocks and shares Isa to invest in corporate bond funds which currently yield in excess of 4%. However, there are risks to your capital.

Q3. I have a cash Isa and I have almost filled it. I am looking around for a good savings account but they all seem to be offering such low rates of interest. What is my best option for saving more than £500 a month regularly? Katie Smith, Manchester.

Principality Building Society offers 4.5% for £500 regular savings account and you can put up to £6,000 into the account, so after 12 months you will have to find another provider. The account does not permit any withdrawals.

Barclays offers 4.17% with a limit of £250 per month and £3,000 total, but allows one withdrawal.

Q4. When I compare Isa rates with taxed products such as easy-access accounts or two-year bonds, I find the net interest rate is at best identical, at worst the Isa pays less. The Isa providers all seem to cream off the tax-free percentage for themselves, so why bother investing in them?Richard Norman, Lewisham, London.

Piggy bank
About 19 million people have Isa accounts

It is true that many cash Isa providers take a proportion of the tax relief by offering lower rates. Their argument is that this is used to cover costs of administering the Isa wrapper itself.

However, there are rates available that are better than their non-Isa equivalent (once tax has been taken into consideration). It is worth checking with comparison websites such as to find out the best current rates as they are constantly changing. Also look at the terms of the account as many include introductory rates fixed for 12 months and then the rate drops significantly.

Isas are recommended by investment experts because taxes are likely to rise in the future and Isas are the best place to protect against this. By using a cash Isa and finding a good rate the saver is at worse no better off, and at best will benefit from the tax relief.

Q5. I have reached my cash Isa limit for 2009-10 and am interested in a stocks and shares Isa to take advantage of the additional £3,600 tax-free allowance. Can you explain more about them and how they work? Lawrence Simpson, Brighton.

Stocks and shares Isas work in a similar fashion to cash Isas. You do not pay any additional tax on income, interest or capital gain and do not need to declare it on your tax return.

You can only hold one stocks and shares Isa each year with one Isa manager. The range of investments available inside an Isa varies with each Isa manager, making choosing the right provider critical.

Some only offer access to managed funds, such as unit trusts, whilst others will include shares listed on a recognised stock market, such as the London Stock Exchange.

The latter type will often charge an administration fee on the Isa wrapper itself. Any investment in an Isa can be sold at anytime, the money does not have to exit the Isa, and you can use it to purchase another investment.

Q6. I have invested £25,000 in a Halifax maxi-stocks and shares Isa but I am currently not paying in any more money. It was worth near £34,000 before the financial problems hit. Do you think I should leave it in there or move the money somewhere else? Mark Harrop, Essex.

Individual and experienced fund managers behaved illogically in the 2008 crisis, by selling at the bottom. It is important to remember that investments go down as well as up and markets have staged a strong recovery, albeit we are still some way off the top.

The first step is to decide whether you want to continue investing; because of the volatility in values it is not for everyone. Once you have decided, the next step is to review your objectives and your attitude to risk.

Check to see if your investment meets with your objectives. Finally speak to an investment adviser as getting a second opinion is always useful and does not need to cost more.

Q7. I have savings in an Isa which has 3% interest a year. However, I also have a student loan and I was wondering if it would be better to pay the loan off in total using all my savings? John, Dartmouth

Money and a financial newspaper
About five million people use their full tax-free Isa allowance each year

In general it is better to pay off debts first. But with the interest on a student loan being so low you can often get your cash earning more than it costs to continue holding the debt. So from this point it makes sense to keep the Isa money instead of paying off the debt.

It is also important to have some savings for a rainy day and an Isa is worth keeping for this reason. However, do not let the debt grow indefinitely, as mortgage providers and other lenders will want to know about any outstanding obligations, so it could affect your ability to get a mortgage.

I would suggest keeping the Isa you have and using any excess money you have from your earnings to pay down the debt. The best way to do this is set up a monthly standing order.

Q8. I have an Isa bond maturing soon, and was wondering what to invest in next. Isa (and other savings accounts) interest rates are very poor, so would now be a good time to go for a stocks and shares Isa, or get a share dealing account and buy shares with the money? Nick Evans, Hertford.

Whilst cash rates are currently low, they will not stay that way indefinitely. With further tax rises likely, the benefits of an Isa will only increase going forward.

You can transfer cash Isas into a stocks and shares Isa without it affecting your current years Isa allowance. However, once done you cannot reverse it.

A stocks and shares Isa will give the opportunity for enhanced returns, but with that comes greater risk. If you do not want to put your capital at a risk, a cash bond fixed for three years will give you 4%.

Q9. I keep my cash Isa allowance topped up but have refrained from using the shares allocation element because of poor returns and expensive fund management costs. Would your advice being any different from this cautious strategy? David Frost, Colchester.

Investments are not for everyone and the risks of losing capital are not worth taking for some. Returns on equities have been poor for many investors over the past 10 years, but there have been other asset classes which have done well and some good fund managers have outperformed.

Currently we are recovering from the bottom of a cycle so the figures do not look as good at present. Fund management costs can be reduced by using a discount broker. There is no need to pay 5% upfront commission, this is too onerous. Ongoing fees tend to be in the region of 1.5% annually and for the right manager can be justified.

If you are happier not getting involved then do not change your habits; only you can decide if you want to invest. An adviser can help select the right funds for you and ensure you are not over-paying for these choices.

Q10. Both my wife and I have individually gathered significantly more than £50,000 from Isas over the years. In April 2010, will it be allowable to split the lump-sums without losing the tax-free envelope so that the sums are less than the £50,000 cover provided by the Financial Services Compensation Scheme and invest the split amounts in different banks? Mark Ritchie, Nottingham.

20 and 10 notes
Next April the new annual 10,200 limit for Isas comes in for all savers

Isas can be transferred to another provider, although not all Isa managers will accept Isa transfers. Once you have found a provider that will accept cash Isa transfers you need to contact them to get the paperwork to arrange the transfer.

Each company has a different policy on how to transfer an Isa so it is worth checking with your current provider what theirs is, especially as you don't want to transfer the whole sum to another provider.

Q11. I have roughly £12,000 to invest. I have been thinking of putting all of this in a five-year fixed Isa or spreading my amount in low risk stocks and shares Isa. What would you advise and how much in each? Peter All, Kendal.

A five-year fixed Isa gives you certainty of guaranteed rate and capital protection.

Considering interest rates are sitting at all time lows at present, and are likely to rise in the future, locking into a fixed rate for five years could mean part way through the term your investment will not look so attractive.

I would suggest considering a two- or three-year bond. Whilst this does provider a lower interest rate, it gives you greater flexibility to move to a better rate in the future. NS&I have recently launched a one-year bond, which at 3.95% looks quite attractive.

I would suggest using your full cash Isa allowance of £3,600 (£5,100 if you are over 50 by 5 April 2010), and the same amount into a stocks and shares Isa, using a multi-asset fund to diversify and minimise risk.

The balance could be put on an instant access account until the next tax year and used to finance your 2010-11 Isa allowances.

Q12. Do you think we are heading towards another stock market fall? I have read this in a few reports so I have taken my money from my unit trust Isa. I am just wondering if I should get back in and possibly when. What sort of fall are you expecting if any? Charles, Southampton.

Stock market falls come very fast and are usually unexpected. The most likely scenario is a correction, usually this would mean a fall of about 10%.

To deal with a correction, you could either ride through it and stay invested, or try and time the market. The latter is the hardest to do and can easily result in greater losses or missing out in rises if a fall does not materialize.

Many investors suffered over the past 12 months by selling at the wrong time and only buying back after markets had bounced. It is the time in the market that counts, not the timing of the market.

Q13. I am currently working to fill my tax-free Isa for this year. Last year's is full and ticking over nicely. I do not intend to use this money within the next year or so. What would be the most effective way to "grow" this money over a year, if not through tax free Isa? Ed Cook, Salisbury.

One to two years would be too short a timescale to make investments into the stock market as the risk of them falling and not recovering in time is too great.

Isas are the only tax efficient vehicle that is low risk, low cost and accessible in this time frame. You may find that there are better rates than you are currently earning on your Isa and I would suggest shopping around to see if you can improve the interest earned.

Q14. We are retired, with good pensions, both increasing with in line with inflation. We also have cash savings mainly in Isa accounts, and equities also mainly in Isas, which are intended for rainy day requirements. What I need some guidance on is how we decide which of these to cash in when we need money, e.g. for a new car, major home renovation etc. Catherine Wykes, Derby.

The first port of call should be cash savings held outside of any Isa wrappers, followed by investments held outside of your Isa, and your Isa wrapped cash and investments as the last port of call.

This is because once you take money out of your Isas you cannot put it back in, so you would lose the tax benefits of the Isa wrapper.

However, do not let your cash deposits run down to nothing. You should top them up with the sale of your investments as this will avoid the need to cash in an investment in an emergency, which can be dangerous because you do not get to choose the timing.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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