Cash ISAs versus Shares under a new Labour Government

29th Jul by Silver Moon

19 comments 724 reads

Something from Money Supermarket today set my finger to key:

Why is now a good time to open a cash ISA?

Interest rates have risen from historically low levels in the past two years. When interest rates rise, so too do savings rates, and this means you should be able to earn a greater return on a cash ISA.

A cash ISA’s tax-free returns are also particularly good news if you have maxed out your personal savings allowance. It allows you to continue building a bigger saving pot without having to pay any more tax.

As of July 2024, the Bank of England interest rate is 5.25%. For example, if you were to invest the full £20,000 into a top-rated cash ISA at 5.1%, you would earn £1,020 a year, assuming the rate remained the same.

So where do we private investors go from here, what's to do?

Hmm, a hundred grand invested would produce five grand or so annually. Trouble is, starting from scratch it would take 6 years. Those like myself with a Shares ISA can sell all of the investments and transfer all those funds into a Cash ISA. This will remove the Risk Factor. All the risks will have been crystalised in the Grand Sale which more than likely means that Capital Losses on some if not the majority of the investments will have been incurred.

This brings me to Risk and Reward, something that Chancellors refuse to acknowledge and which should be positively balanced in favour of Reward. As usual it is the Little People who get caught out by Chancellors tampering while the really wealthy have many options to preserve their investing in shares. Setting up Trusts, creating spaghettis of offshore companies or simply decamping to places like Monte Carlo.

Risk is seen in investments that I personally made, companies that disappeared practically overnight either by declaring bankruptcy, delisting or being taken over by another. My records tell me of at least 15 companies which lost me a lot of cash this way, Conviviality, Moss Bros, Communisis and Carillion for instance. It’s a fact that over the next few decades many companies will no longer exist.

Reward is easily illustrated in one of my holdings, Pan African Resources, not a large holding since it mines gold in South Africa. It pays one dividend annually, currently four percent on the current share price of twenty-eight pence.…

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wattanut

29th Jul

As you say, starting from scratch is difficult because of the 20K limit. Why not not use a money market fund instead? CSH2 pays the SONIA rate, currently 5.2%. I park all my spare cash in it.

bullhead

Because you would pay tax on it it is classed as interest income

if you have used up your personal allowance at a starting rate of 20% and going up

https://monevator.com/money-ma....

https://www.gov.uk/apply-tax-f...

Tim Boucher

I would guess wattanut means buy CSH2 from within your stocks+shares ISA (rather than switching out to a cash ISA, or starting fresh in a cash ISA), as this gives flexibility to move back in to stocks when desired.

Maybe he was but why is he talking about starting from scratch and the 20k limit then ?

Minor thing really just wanted to point out to anyone thinking about doing that it would be taxed as interest outside an ISA

Will have more of an idea of Reeves intentions after her speech at 3pm ish

Will have to wait to autumn budget for details though

Hopefully she doesn’t fall for the siren call of socialism

Personally not hopeful time will tell

Rusty2

You can switch quite quickly between cash and stock ISAs now. Took 1 day to switch cash from my Stock ISA into my Cash ISA.

You want to get as much into ISAs as you can.

Good advice

ISAs is the most flexible way to save tax free as you say you can switch from shares to cash easily now and I’m not sure wether the current amounts yearly or maybe a maximum amount you can hold will change in next budget

Quest

Press reports indicate that Reeves may be looking to increase the tax rate for CGT in line with income tax rates. Not good news if you are a higher rate tax payer. I am looking at switching more funds to Investment Trusts(hopefully with first class managers). The rationale being less exposure to CGT from switching between individual equities,

Any thoughts guys?

Won’t just be higher rate tax payers with an increase in CGT lower rate will increase from 10%-20% I should think as well as higher rate going from 20%-40% not sure if they will increase the rate on second homes buy to let etc this is already higher 18%-24% respectively so would probably end up closer to 30%-50% on any gain in a second property

If you have a buy to let time to start to do some tax planning

Also worrying they are taking away winter fuel payments for anyone not receiving benefits this could be the start towards means testing state pensions eventually

Will be lots of tax advisors coming up with ways to avoid the increase in taxes Quest will have to wait for the autumn budget to see exactly what they do

In the mean time top up any ISAs and look at doing the same with your pension as tax relief may be on the agenda too we will see

I think pretty long term so I am happy to delay realising gains. My point concerning investment trusts is that they will hold my gains until the tax regime is somewhat more favourable.

timarr

Some interesting points here that take a bit of unpicking.

I've been banging on for years at younger investors about using their ISA allowances. When you've been using your allowances for 30 years, as I have done, you're suddenly looking at a significant pile of money with CGT and income tax protection. Of course, some future government may target this huge pot of money, but it's unlikely existing pots will be impacted.

As regards Cash ISAs - don't bother. They're a guaranteed way of losing money in real terms and should never have been created.

If you have spare cash in a Stocks and Shares ISA then buy gilts - you're locking in higher rates anyway and probably getting a capital return. If you have cash outside an ISA then also buy gilts, just make sure the coupon is low and the majority of the return is from capital gains as gilts are CGT exempt. Of course, the geniuses at Moneysupermarket may not be correct, but it's not for me to say.

The risk versus reward issue is often misunderstood, unsurprisingly given the amount of confusion around it. You'll have to buckle in, if you want to get the full benefit of the explanation ...

Economists have long noted that shares provide an excess return over other asset classes. The idea is that if some asset class - cash, say - provides a better return than shares then share prices should adjust to take acount of this and reduce the future return. It's called the Law of One Price. It's about the only thing in economics that makes sense. Sadly it doesn't work.

This type of price adjustment doesn't happen in reality and shares, over most periods, provide a better return than other types of assets. In order to explain this economists have invented something called the equity risk premium, which sounds impressive but could equally be given some other name such as magical unicorn crap for all the theoretical underpinning it has.

Anyway, the equity risk premium theorises that the reason shares provide better returns than other asset classes - and that small cap shares do even better - is because investors are taking on more risk. This sounds immensely obvious and as this is economics should immediately be cause for suspicion. Such concern is justified as when economists talk about "risk" they mean "volatility" rather than what we would consider risk - i.e. losing all of our money in some dodgy scam. As individuals we should be focused on total return - capital gain plus dividends - not the ups and downs along the journey.

Sadly a lot of people think the idea that taking on more risk means getting better returns equates to buying shares in terrible companies. It doesn't. If you buy shares in terrible companies what it means is that you lose all your money.

Which is a terrible idea and you shouldn't do it, especially when wonderful companies like Relx (LON:REL) and London Stock Exchange (LON:LSEG) have gone up between four and five times over the last decade without including dividends. Why chase unicorns when the local horses can give you a perfectly acceptable ride?

Of course, there are a few people out there who have the time and skill to analyse terrible companies properly and are able to identify the odd one that is badly mispriced. But that shouldn't blind us to the reality that - mostly - investing in rubbish companies leads to rubbish results.

Fortunately it's fairly easy to avoid terrible companies. The only UK company that's gone bust in the last twenty years that was a suprise, that I can think of, is Patisserie Valerie, which was out and out fraud. Usually, though, there are warning signs. Although I don't know why people invest in restaurant chains anyway, they're a graveyard of misplaced expectations and overpriced gluten.

Learning to invest in shares is one of the most liberating things anyone can do. You don't have to be a genius to do reasonably well. A reasonably competent person can beat the indexes by a modest amount over any reasonable period by simply avoiding doing stupid things (I should know). Unfortunately there are a lot of innate psychological drivers that push us towards doing stupid things: investing is one part skill to nine parts discipline. Of course, you need the discipline, but whatever you do don't try to do it without the skill.

To be honest do think most investors are better investing in investment trusts ETFs REITs you can get a broad exposure to asset classes different geographies and sectors and like you say play the long game

For my children’s ISAs I largely stick to these

For myself I take more risk and pick more individual stocks but I read a lot every day not everyone has that time available or the will to do it and as timarr says above you need a lot of discipline and patience

Warren buffet on Jack Bogle

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Thanks timarr

Very well put and written better than I could put it

I have held shares most of my adult life and like yourself built up a reasonable pot I do think sometimes people look for a quick return when most of your long term returns are down to compound returns through smaller gains and dividends

If you don’t want to put in the time into individual shares do it through pooled investments if you stick money away each month in a tax free wrapper it will quickly build up

I have spent a fair bit of time in gyms over the years and getting returns in That is the same you stick at it year after year if you do it right you make steady progress and can transform your body over 3-5 years especially as a young man but will keep you young and strong to as you get older “if you don’t use it you lose it”

Another form of compound interest

Hate to always be pessimistic maybe it’s because I am getting older but think we may have had the best of it see the present government tinkering and trying to get hold of some of peoples pots of money they have built up over the years

Would love to be proved wrong

The Phoenix

Agreed Bullhead and I am a perfect example of what you quote I work in the wealth management industry and as such have access to the top fund managers and economists from the likes of JPM and Invesco.

I would put myself above 99% of the population in terms of investing knowledge but on this site I'm probably in the weakest 25%.

I love investing and have spent regularly 10-20 hours per week on research but over say ten years I have probably only done slightly better than parking it all with Fundsmith or Rathbones Global Opp's.

As such I am moving towards a trust based portfolio which includes a gold etf, oil exposure, my bond proxies are the big insurance companies on the basis they should do okay in a falling interest rate scenario and they won't halve overnight.

The light swtich went on for me after 20 years in the game about 12 months ago when I thought I'm putting all this effort in for average results maybe I should create a trust based portfolio I can maintain outside of bear markets for 1-2 hours per week effort.

I think the big think you need in this business other than having a screen to throw up decent stocks is disiplin to get out sharpish if a purchase heads down, this is the Naked Traders greatest skill its also the toughest to master which is probably why most investors get average results.

Silver Moon

Means tests, aren't these all about income? Now that we are all joined up in the goverment's scheme of things surely the HMRC knows exactly what our means are, no need for any testing. Those without company pensions or private pensions must be at rock bottom now, maybe tax credits help out but not ever been in that position I wouldn't know. Changing the subject slightly, next week I'll hit 80 years of age and I have received a letter by snail mail from the Dept of Work & Pensions saying that my State Pension will be increased by twenty-five pence per week. You may well titter but I can hear Hunt laughing aloud in the background.

30th Jul

First and most importantly happy 80th birthday for next week have a great day

The way I should have put I guess is the only pensioners who will receive the winter fuel payment will now be those already on extra benefits which will mean you will not be receiving it if you have saving or a pension which will cost you about £6 a week over the year

https://www.moneysavingexpert....

Have a friend who worked at J.P.MORGAN who came to exactly the same conclusion as yourself Phoenix

illiswilgig

A tour de force Timarr, and thank you! Fascinating.

investing is one part skill to nine parts discipline.

plus one part luck? The joker? Which can undo all that discipline when I attribute it to skill instead?

As Phil Fisher said there are two types of investor,

Those that are lucky and able (I wish)

and those that are lucky they are able. Which is very much how I feel after the last few years.

I've had the opportunity to learn a lot about risk and volatility first hand recently. Hard lessons for me. I don't feel lucky today. I do feel much better prepared to face whatever the investing world will be throwing at me next. No doubt it won't be pretty? Tax is only one part of that, and maybe not a large part?

I've never had a cash ISA. Never had a need for one. I've always been pretty much fully invested in individual companies. The dividends from these companies provide my income stream nowadays but its the capital gain that will provide for my future.

As I've grown older I have a much smaller number of companies in the portfolio, not quite Rhomboid-esque levels of concentration yet, more an investors dozen, but I still aspire! Somewhat counter-intuitive perhaps? Except I know a lot more about these companies. I've been invested in some for more than a decade. It seems to me that I've reduced my risk, by removing companies where my knowledge and conviction is not as good? I certainly sleep better. Whereas conventional wisdom has it that I've increased my risk to a very high level? Odd? Perhaps this is how I will become lucky?

I don't intend to let the tax tail wag the dog. But it's not easy and there seem to huge quantities of stories of investors taking profits now to avoid more tax in the future? Taking some profits now (outside the ISA) seems temptiing?

In the short term there is an argument. If I was going to take some profit anyway, better to do it at a lower tax rate today? Than tomorrow at a higher rate?

In the long term, if I'm invested for growth then the maths doesn't stack up? By paying tax now, I lose the growth on the funds that could have remained invested for a long period, and for me that gain more than outweighs the likely increase in tax?

Maybe I should pay more attention to any short term decisions I may need to make? But otherwise it's perhaps more psychological and an exercise in delayed gratification as much as it is optimising investment returns?

cheers

Mark

As I say I love the research and digging around like most on here but you do reach a point where you have to think if I'm only doing a bit better than the long term average I'm better off putting my efforts into something else.

I think as you get older and you become more aware of the time clock running down this becomes more of an issue as you start to revaluate your life priorities.

Without blowing smoke up ----- their are some outstanding posters on this forum Timar just being one example, I remember when Truss blew up the gilts market the first time I became aware of the issues with final salary pension schemes was via Tim, trade press/internet was way behind him.

Funny thing was I met a bond fund manager from L&G a few weeks after the incident this chap is in the top tier of what he does but even he admitted to being blind sided by ldi's and L&G was one of the biggest faller's when it all happened.

Hi illiswilgig, I guess the old adage goes here, if in doubt do nowt. With my limited income and no prospect of raising it what I've been doing for the last three years is identifying holdings in my non-ISA account to sell in the month of April, after the 6th. Preparation being the name of the game, things to consider are dividend yield, Capital Gains and Capital losses and a limit of twenty thousand pounds in total return from my sales. Then to Bed & ISA those chosen. This is at the beginning of a new Tax Year and I take things from there, satisfied I have done my best.

Cash ISAs versus Shares under a new Labour Government

Why is now a good time to open a cash ISA?

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Silver Moon

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