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Are Cash ISAs a worthwhile investment for contractors?

Published on Apr 14, 2009 |

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Cash ISAs have been the fail safe option for savers since they were first introduced 10 years ago. This is largely due to the attractive tax benefits that they offer however, with base rates at historic lows and interest rates falling on a monthly basis, savers are seeing the return on their investment dwindle.

This time last year, ISA providers were offering up to 6% on their Cash ISAs but now savers are lucky if they receive half that, with many High Street banks offering as little as 1%.

This has been a massive blow to prudent savers that may have invested their full ISA allowance each year and could have watched the annual interest payment fall by £1000.

With returns at an all time low, savers are increasingly tempted to jump ship and look for an alternative home for their cash.

What can you do?

Changes to ISA legislation that came into force last April allow investors to transfer funds from cash into a stocks and shares ISA without losing any of the tax breaks.

This is an increasingly attractive prospect as interest rates fall and many savers are opting for corporate bonds as a midway point between cash 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.

It is worth bearing in mind that ISA's can only be transferred from Cash to Stocks and Shares once and can't be switched back.

So you need to be prepared to accept that this is a one way street for your money but if you can invest for the long term then you are in a good position to ride out any short term fluctuations in the markets.

If you are concerned about the risk involved in timing your entry into the stock market you could drip feed money each month from your Cash ISA into your Stocks and Shares ISA.

This is known as Pound Cost Averaging and 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. There is, of course, an inflation related risk in doing nothing too.

More Information

Tony Harris is Managing Director of Contractor Financials, contractor-specialist Independent Financial Advisers. You can read more about the services available to contractors in our guide to contractor finances.