I’m none the w-ISA

Reader’s conundrum as he looks to get a better return on his savings

Financial worries or just looking for better value for money? Consumer champion Fergus Muirhead answers your questions

QI’D LIKE to invest a £5000 lump sum, followed by £150 per month. But I’ve only been offered 0.4 per cent interest per year for this investment. Does that sound good or bad? Robert McKelvie

AAT ONE level this is a very simple question, with a very simple answer. And that answer would be that 0.4 per cent doesn’t sound good at all as a return, either for your lump sum of £5000 or for your regular monthly investment of £150. But as usual, the questions that lie below your initial query are much more interesting to answer, and are questions that are being asked by thousands of investors. Interest rates have been ridiculously low for nearly 10 years and while this is great news for anyone borrowing money, it’s terrible news for savers.

It’s particularly affecting people who have retired and are relying on their savings growing faster than inflation to protect the value of their incomes.

So, a number of issues need to be addressed here to fully answer Robert’s question.

The first is to examine the type of account Robert is looking at, and for starters I am assuming that the 0.4 per cent quoted is coming from some sort of instant access deposit account.

These rates change but at the time of writing there are better rates than 0.4 per cent and a look at a comparison website like www.moneysupermarket. com or www.moneyfacts.co.uk will let you see a full list, as well as ways to open the account you choose. For example, Virgin, AA and Post Office Bank all offer rates above one per cent for their easy access cash ISA today.

And this is the next thing you have to look at. Will you get a better rate of interest with a cash ISA than you will in a basic savings account?

It’s not always clear cut and you usually have to do your homework to find out the answer.

The argument usually used is that you are better putting your first £20,000 in an ISA because you won’t pay tax on the interest you earn. But, depending on your personal income

tax position, you might not pay tax on interest from a bank account either. So it should be the highest rate that you can find that should determine the account you open, rather than whether it is an ISA or not.

If you are unsure about the tax implications of all of this, then you should speak to a suitably qualified adviser before making a decision.

The next issue you have to address is when you are going to need the money you are investing.

If you might need it next week or next month to pay a bill or go on holiday, it needs to be in an easy access account. If it’s for next year or some time in the future, you might be able to look at an account, or an ISA, that gives a better rate of interest because it keeps your money tied up for 12 months – or longer.

You need to make sure you won’t need the money before the end of the fixed rate period. And check out any loss of interest penalties that might apply if you do withdraw your cash before the end of the fixed period.

You also have to consider how much risk you are prepared to take with your money.

If you want it to keep pace with inflation, currently running at around two per cent, then you will probably have to put it somewhere other than a savings account or cash ISA. A stocks and shares ISA might be appropriate for you. Whether it is or not depends on several factors, some of which I have already mentioned.

If you need the money tomorrow, this type of investment probably isn’t right for you. The value of these investments can rise and fall in the short term, so £5000 invested today might only be worth £4900 next week.

If you are investing for the longer term then it probably would make sense but you would need to choose an ISA with funds that match the amount of risk you are prepared to take as this can vary from fund to fund.

Or you may want to hedge your bets and put your lump sum, or some of it, in cash and put the monthly savings into stocks and shares ISA.