Investment Comparison - Cash ISA Returns
In the UK, ISA’s can represent a good tax efficient cash investment vehicle and would normally form part of a saver’s portfolio if they are a UK tax payer. However, care is required! For example, it is clear that whilst advertising comparatively high initial rates of return, many ISA’s drop to low interest rates after an in initial ‘welcome period’. This situation is compounded by the fact that some ISA’s heavily penalise or restrict savers who want to move money from account to account. It must be emphasised that Geo Green Power is not a tax or financial advisor, and merely duplicates here comments and statistics that have been published elsewhere by financial experts. An analysis carried out by Money Mail and published on the award winning website “this is money” http://www.thisismoney.co.uk/ in March 2010, listed some of the worst and best variable rates offered by ISA providers. The table below summarises the main findings. The picture as described in the Spring of 2010, broadly represents the situation now, where many cash ISA providers lure new savers with high initial rates and then quickly drop to low rates of return as soon as they can (note that in any list of ISA returns the same provider will often have a more recent ISA offering a relatively high rate for new savers, as well as ‘rewarding’ loyal existing savers by dropping their older ISA to a miserly low rate).
There are currently higher rates available for Fixed Rate Term ISA’s. However, it’s not straightforward to compare a fixed rate return to a return that is indexed linked. The tariffs paid for PV solar energy and the returns calculated from them are linked to the Retail Price Index. Thus if inflation rises over a period of time (which it is generally expected it will over the next 5 years), then the rate of return on tariffs from the PV solar panel investment will increase in line with that higher inflationary rise. So if in 2013 the rate of inflation is 5.5%, then a fixed rate ISA return of 4.5% can be considered to be an effective return of minus 1% a year (i.e. a loss in real terms). On the other hand the payments for energy generated by solar PV will likely be even more attractive as they will have risen with inflation. Certainly in the case of a fixed rate term ISA, the investor is speculating that future values of inflation will not reduce or reverse the value of their investment. For this reason, it seems more appropriate to use Floating Rate Cash ISA’s (as opposed to Fixed Rate Cash ISA’s) as benchmarks when comparing with likely returns from index linked renewable energy payments.
For the purpose of graphically presenting the likely return on a Cash ISA, it seems reasonable, as of 2010/2011, on the basis of the above research, to represent the likely net return from a Cash ISA as 1.5%.
For more information please see the following articles quoted from Money Mail as published on the website www.thisismoney.co.uk
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