The Best Cash ISA Alternatives That You Should Be Using
If you’ve got a cash ISA with a UK bank, you’ll be aware that the paltry interest rates being offered right now are of no benefit to your wallet or lifestyle.
In the last couple of years, ISA interest rates have crept further and further downwards, with the latest sweep of cuts announced earlier this year.
This means that cash ISA customers of NatWest, RBS, Halifax and virtually every other bank and building society will no longer be seeing visible returns on their money. Sure, the interest is still there – just about. But it’s so meagre, its barely noticeable to the average working person.
We all know now that cash ISAs are no longer the best way to make the most of your money; therefore, what is?
We explain the best alternatives to a cash ISA you can try.
Peer-to-Peer lending allows you to lend your money to other people in need of a loan. Impressive interest rates…and no middle man.
As well as individuals, you can also lend to small businesses or startups in need of a boost. Interest rates vary from 5% (with Zopa‘s price promise and the potential to be lending to multiple individuals) to a whopping 12% with TrustBuddy. Funding Circle also offers 6.10% on business investments.
The main thing with peer-to-peer lending is that you always read the small print, as many of these services require fees which may not be included in your actual investment. Peer-to-peer lending is regulated by the Financial Conduct Authority (as of 2014) but that doesn’t mean there aren’t potential risks. For example, you may not be able to have immediate access to your money; you may even lose money, and on the whole, one of these investments isn’t a viable long-term option.
You may think its bizarre that a current account could offer more interest than a cash ISA, but that’s just the kind of economical climate we’re in right now. Many of today’s current accounts offer steady interest rates of up to 5%, which you certainly won’t get on any ISA account.
Nationwide’s FlexDirect is currently the market-leader in current accounts, offering 5% on balances up to £2500 for 12 months. TSB’s Classic Plus is another high favourite, as while its limit is £2000, the 5% interest doesn’t drop after 12 months. Clydesdale Bank, Lloyds, Santander and Yorkshire Bank also all have similar appealing offers, but each comes with its own restrictions, so be sure to read these carefully first.
The main downside to doing things this way is that you will no doubt need to switch your account and probably your banking provider, in order to get the best deal. But thanks the 7-Day Switch Guarantee introduced in 2013, switching is easier than it’s ever been, and you can always simply renew or switch your account at the end of the 12-16 month period, to keep your interest rate high.
Share ISAs (also known as stocks and shares) can bring about great returns on your money up to an allowance of £11, 520…providing you play your cards right. In order to make the most of the full allowance, you’ll need to have let your current cash ISA expire, but the returns will be tax-free.
With share ISAs, you’ll need to have your money invested ideally for at least five years before seeing any return. However, it’s a good long-term option if you’re looking for something with minimum upkeep, and the longer you leave your money for, the faster your balance will be able to recover from losses.
Of course with any type of stocks or share investments, there’s always the possibility you’ll lose money, so keep this in mind before investing. You can lower your risks by diversifying your investments – speak to a financial adviser or investment banker who will be able to guide you. If you don’t feel comfortable choosing your own shares, an index tracking fund can help by tracking the performance of the index your shares are based on.
Many share ISAs offer you the opportunity to enjoy compound interest – receiving interest on your interest. With these sort of scheme, even saving just £100 a month for five years can bring significant gains for the future.
For more information about share ISAs, click here.