How to double your Isa allowance
Cash Isas are fine as far as they go. But savings limits and interest rates are low. However, there is a way to get a better rate and effectively double your Isa allowance by exploiting a new market ripe for investors. Bengt Saelensminde explains how.
It'sIsa season. And if you haven't availed of your entitlement to stash £10,200 ofsavings free of incometax and capital gains, you have until just 5 April to do so.
If you've already used your allowance, then stay with me today. Because I have a very interesting proposal for you. Something that you can do as soon as next year's allowance comes into play on 6 April.
This is a way for you to exploit the opening of a brand new market to get all the benefits of a cash Isa. And here's the really good part: if you follow my recommendation you will get a much better rate of interest and you'll double your allowance too!
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Here's how it works.
What's the point of a cash-only Isa?
There are two types of Isa, cash or stocks & shares. Of your £10,200 limit you can put half in a cash Isa - leaving theinvestment to earn interest. And you can then invest the other half in a stocks & shares Isa.
Or you can just invest the whole lot in the stock Isa. And in the past, that's what I've usually done. When I see a cash Isa offering something like 2% or 3% I can't help thinking... what's the point? It might be the safer option. But you can only put away £5,200 a year in a cash Isa anyway - the tax savings seem modest, at best.
With a stock Isa you can invest your full £10,200 entitlement into a range of eligible investments. And that's what's interesting. Because as of last year, a brand new market has just opened up to private investors.
Take a bit more risk for the best deals
For too long, private investors have been frozen out of thebond market and shoehorned into equities, or cash. But just over a year ago, the Stock Exchange opened the door to retail bonds.
The Order book for Retail Bonds (ORB), means that you can trade in corporate bonds and gilts directly through most stockbrokers. It opens up a brand new opportunity to deal in a market that was previously only available to City professionals.
Like equities, bonds have the potential for capital growth (or loss!) But they also share some characteristics with cash.
A bond promises to pay you interest, and the return of your money at the end of the term. To be eligible for your Isa, the bond has to have at leastfive years left to run. But don't worry - you aren't tied into the investment forfive years. Unlike many fixed interest accounts you'll find on the high street, with these bonds, you can trade in and out, just like shares.
I want to show you a few bonds that are on offer on the market at the moment. Let me give you an idea of what sorts of interest you can expect.
How about 7.5% tax-free?
Recently there have been some interesting bonds released that are aimed at private investors.
Tesco and Lloyds have both issued bonds offering rates way above anything you'll get in a cash Isa. We're talking about over 5%.
Now, I don't want to mislead you. Like I said, a bond isnot cash and it doesn't benefit from the government's Financial Services Compensation Scheme (FSCS) where the first £85k is guaranteed if the bank defaults.
Also, the bond value will fluctuate, depending on interest rates and the credibility of the provider. Interest rates up, generally means bond prices down. So if you need your cash and decide to sell, you could end up with more, or less than you originally put in.
But I reckon you'll probably get back more. I've said before that I think rates will stay lower and for longer than the markets are reckoning on. And on that basis, the capital value of the bond should appreciate. Your guaranteed 5% coupon will start to look better and better.
Either way, if you hang on to the bond until maturity (and so long as the provider doesn't default), you will get your interest and you'll get your money back. In that sense, it's just like cash.
And let me just put the risk of the two bonds I've just mentioned in perspective. Tesco takes aboutone in everyeight pounds spent by UK consumers. Lloyds is in nearly half-owned by the government. So I'm happy to take my chances with these guys. Pay me double the rate I'll get on a cash Isa and I'll take it.
If you want to be even more adventurous, Provident Financial has just closed a 7.5% bond offering. Clearly you're taking on a bit more risk here - but this is still a very high quality firm. And remember, even if a bond provider goes bust, all may not be lost. You'll still be ahead of equity holders in the queue for your money back.
7.5% tax free interest looks like an Isa proposition.
First things first: Open your Isa
At the moment, the three bonds I've just mentioned are closed to new subscribers. You can buy them second-hand on the Stock Exchange's ORB. But I wouldn't recommend that. For starters, you'll end up paying more for the them.
And from what I've heard, there will be more offerings coming. The recent issues have been so successful that the providers have hinted at new issues - so you may be able to pick them up very soon.
That means if you want to take advantage, you need to be ready to go. Open your stocks & shares Isa before 5 April and just leave the cash on the account for the moment. Okay, you won't earn much interest, but you're biding your time until the right investment crops up. If you haven't opened an Isa before, you can check out the best deals here.
Not all brokers deal in ORB securities and not all brokers are able to get in on the best new issues. So talk to them first. Ask them if they will be dealing in any new issues on ORB.
As and when I hear any news on a new bond offer, I'll let you know. I expect to hear something in the next month or so.
This article was first published in the free investment email The Right side. Sign up to TheRightSide here.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798 https://www.fsa.gov.uk/register/home.do
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.