The new ISA year has started and we have an allowance of £20,000 to use up. That's the amount we can invest over the year without paying any tax on interest or capital gains (or higher rates of tax on dividends). And to my mind that's a terrific incentive to go for the one thing that beats all other forms of investment hands down over the long-term -- shares in top quality British companies.
But it saddens me that 75% of ISAs taken out every year are cash ISAs. Sure, if you have some cash savings it's nice not to pay tax on the interest, but how much are we actually talking about here?
Hardly worth it
A quick search for best cash ISA rate shows we're generally looking at less than 2% interest per year. Even assuming you can stash away the whole £20,000 and that you're a higher-rate tax payer, you'll only be saving around £150 per year maximum.
Another thing that confuses many people is the creative marketing used to sell ISAs. A friend recently asked me if I had any idea why the interest rate had suddenly dropped on his ISA, and it seems he'd been sold an ISA with a fixed-term rate which had just expired -- and it had fallen to only around 1.5%.
Now, you can transfer to another provider if that happens, but how many people will bother with all that palaver? A cash ISA is a great thing -- for the people who sell them, not for ordinary investors.
Shares come out tops
If, instead, you take out a stock and shares ISA (which is a silly name, as stocks and shares are the same thing), all you'd need to do to beat the income from cash is buy a FTSE 100 index tracker. Over the long term, the UK's top index has been providing dividends of around 3% per year, though over the past 12 months it's done a little better.
If you're after bigger dividends, you can buy some high-yielding shares directly. Utility companies are typically big payers -- National Grid at around 5% per year, with SSE on about 6%. BP and Royal Dutch Shell also offer big dividends, as do some of our top insurers and housebuilders.
That's just the dividends, and I haven't even looked at share price appreciation yet, so what should you expect over the long term? Since the inception of the FTSE 100 index in 1984, it has increased in value by nearly 600% -- so every £1,000 invested back then is now worth nearly £7,000.
Of course, you'll have some years when the value of your shares falls, which is why buying them should always be seen as a long-term investment. How do the ups and downs pan out?
Barclays publishes its annual Equity-Gilt study, which compares various kinds of investment every year since 1899. And it has discovered that over rolling 10-year periods, shares have beaten cash 91% of the time. Over 18-year periods, that figure rises to 99%, and over 23-year periods shares have never once been beaten by cash -- and in most periods, shares came out way ahead.
And it calculates that £100 invested in the UK stock market in 1945, with all dividends reinvested, would be worth close to an inflation-adjusted £180,000 now.
ISAs are wonderful, but I reckon you're wasting a great opportunity if you go for cash rather than shares.
What you'll learn, more than anything, is that the secret to long-term financial success is to spend less than you earn, invest your savings in shares, and perhaps most importantly of all... keep a cool head when all around are losing theirs.
Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays, BP, and Royal Dutch Shell. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
10 things your bank doesn't want you to know
10 things your bank doesn't want you to know
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution.
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself.
Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.
Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.
Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.
As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.
If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.
If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.
If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.
The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.
If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.
If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.