By JONATHAN COWAN 24/04/2008
On 6th April the ISA & PEP rules changed. The annual ISA allowance increased to £7,200, PEPs have become Stocks and Shares ISAs and you can now also transfer Cash ISAs into Stocks and Shares ISAs. This rule change is designed to make administration of your investments much easier. You can consolidate all your ISAs – Maxi, Mini Stocks and Shares ISAs, PEPs, even your Cash ISAs – into one Stocks and Share ISA.
So is now a time to free up your cash ISA’s?
There are many issues to consider, Your reasons for putting money in cash ISA’s may no longer exist, you may have been saving your cash ISA’s when your outlook was uncertain or your career was not as settled. After years of putting money into cash ISAs you may now have sufficient cash savings, possibly more than you actually want. So perhaps you would like take some risk or dedicate a proportion of this sum to investing for the long term.
Cash ISA’s will pay you an interest of around 5% (excluding deals with strings attached). However, with interest rates falling and inflation on the rise, perhaps cash is no longer king! Cash rates are no longer as attractive versus other income paying assets and with no potential for capital gains a 5% return looks rather unappealing.
At present the bond fund market is looking very attractive versus cash, the high yield arena is currently priced with net yields of nearly 9%, which is above the long term returns of equities. Whilst the performance of some strategic bond funds (New Star High Yield, Artemis and to a lesser extent Henderson) and Corporate bond funds (New Star Sterling Bond, Old Mutual and to a lesser extent Royal London) were hit hard by the credit crunch, we believe these funds have strong recovery potential and should not be overlooked purely on the basis of short term performance credentials.
Don’t forget none of this is to suggest that a rise in bond default rates is now unlikely happen, however the view of some managers is that we are now being more than adequately compensated for this risk and these asset classes (investment grade bonds and high yield) now offer very compelling risk reward characteristics relative to equities.