The Death of Cash ISA's

With interest rates at their lowest in over 300 years, cash savers are taking a hit. Could this sound the death knoll for Cash ISA's?

Cash ISAs have been the fail safe option for savers since they were first introduced 10 years ago, largely due to the fantastic tax benefits that they offer. However, with interest rates falling on a monthly basis, savers are slowly seeing the return on their investment dwindle.

This time last year, ISA providers were offering up to 6% on their off-the-shelf Cash ISA's but now savers are lucky if they receive half that, with many High Street banks offering just 1%. This has been a massive blow to prudent savers that may have invested their full ISA allowance each year and may have seen their yearly interest payments fall by around £1000.

With job insecurity at a high and returns at an all time low, savers are increasingly tempted to jump ship and look for an alternative home for their cash. According to the British Bankers' Association (BBA), savers withdrew £2.3 billion from their investments in January, which is the largest withdrawal in over a decade.

What can you do?

The changes to ISA legislation that came into force last April, allow investors to transfer funds from their cash ISA into stocks and shares ISA's without incurring any tax penalties. This is an increasingly attractive prospect as interest rates fall and many savers are opting for corporate bonds as a midway point between savings and the stock market. Despite carrying a lower risk than stocks, the returns can still be high particularly as bonds look very undervalued at present.

However, it is worth bearing in mind that ISA's can only be transferred from Cash to Stocks and Shares once and they can't be switched back so you need to be prepared to take on the risks involved. If you can invest for the long term then you are in a good position to transfer as you will be able to ride out any short term fluctuations in the markets but you should be prepared that over the course of your investment you may see the value of your ISA fall as well as rise.

If you are concerned about the risk involved then you could drip feed money from your Cash ISA into your Stocks and Shares ISA in order to spread the risk. Pound Cost Averaging allows you to minimise your exposure to fluctuation in the markets as you are not investing all of your capital in one hit.

Can you afford to wait?

You might find it useful to keep an amount of cash aside to act as a safety net in case you find yourself in between contracts or with an unexpected bill to pay. If you feel that you cannot take the risk of moving your cash over to a stocks and shares ISA then you may just have to ride out what could be several years of low interest rates and there is , of course , a cost of living related risk in doing nothing too.

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