The base bank rate has been cut to a miserly 0.25% and banks are responding by dropping rates on savings products like the ISA. First Direct started the trend when they announced their cash ISA rate would be slashed to 0.4%, giving savers less than 1% on their cash ISA savings. With others quick to follow, ISA rates have taken a big hit since the move.
Making matters worse, 2016 inflation is forecast to be 1.4%, so the real rate of returns on money kept in an ISA will actually be negative. This means your savings will be worth less at the end of the year than when you put them in at the start.
The investor in search of real returns will need to look elsewhere, which may mean thinking outside the box. Let’s take a look at a few alternatives.
Stocks and shares ISA
While cash ISAs are effectively giving negative returns, a stocks and shares ISA can offer market returns – though it does come hand in hand with market risks. Investors – or savers, as they are called in this case – receive the tax advantages of an ISA while gaining the option to add in shares, managed funds, corporate and government bonds, and so on. Since these can go down as well as up in value, you should only invest if you’re comfortable with the risks.
There are many flavours of peer-to-peer lending, with the basic idea being that people can select an individual company, or portfolio of companies, and lend to it/them at a predetermined rate of return. Rates of return from P2P lenders range from just a few per cent to 10% or more.
These also come in many flavours, with some property funds providing rental income and others focusing on capital gains. While property is often seen as a safe bet, investors should be aware that there can be periods where the value of underlying properties can decrease.
Fixed-rate bonds are long-term debt instruments that offer investors a predetermined rate of return that, due to the longer holding period of the bond, is often higher than what savers get from a current account or cash ISA.
While these are the alternatives most people are more comfortable with, there are other ways to further spice up your portfolio. For those who can afford it, the following options can offer greater potential returns – but at a much higher level of risk.
Venture capital trusts
A venture capital trust, or VCT for short, is a tax-efficient UK closed-end collective investment scheme that invests in small companies, either unquoted or trading on the alternative investment market (London Stock Exchange’s AIM). VCTs give investors access to the potential returns of early-stage investments with the liquidity of being listed/tradeable on the market.
Investors gain exposure to a wide array of early-stage investments and the accompanying EIS/SEIS tax reliefs when they choose to invest in an EIS or SEIS fund. While the potential upsides are high, these funds invest in very early-stage businesses and take on board the risk that any or all may go bust.
Think you’ve got what it takes to uncover the next Facebook or Google? You may wish to diversify your portfolio by adding a few riskier angel investments through one of the many platforms currently available (including, of course, SyndicateRoom). While many early-stage UK ventures offer SEIS or EIS relief, you should only be prepared to invest what you can afford to lose.