Smothered by a safety cushion

By DAILY MAIL REPORTER
Updated: 18:00 EST, 27 March 2001

INVESTORS are turning their backs on shares and beating a retreat to the bank as stock markets around the world continue to see-saw violently.

With just a week left to invest in Individual Savings Accounts (Isas) this tax year, many savers have decided to stick to the safety of cash mini Isas. Sales of stocks and shares Isas have fallen by as much as 50% on last year.

High Street banks, however, are benefiting from increased trade. Halifax says it sold 29,000 cash mini Isas in December 2000, and an average of 80,000 a month this year. Abbey National is also reporting an increase on last year for its cash mini Isa, as is Alliance & Leicester. Nationwide, though, says there has been no significant increase in its sales.

The current rates for an investment of £3,000 into a cash mini Isa are 6.15% at Alliance & Leicester, 5.8% at Abbey National and 6.2% at Nationwide. Halifax is cutting its 6.4% rate to 6% on 6 April.

While it makes sense for investors to have a comfortable cash cushion before even thinking about shares, there are some points to consider before opening a cash mini Isa.

First, a cash mini Isa must always stay as cash. Once you have opened it, you cannot convert it into a stocks and shares Isa when you feel more comfortable with the stock market, for instance.

You could open a cash mini Isa and a stocks and shares mini Isa, putting £3,000 into each, and find a home for the remaining £1,000 - from the total £7,000 allowance - in insurance-based products.

But if you want to avoid shares altogether, you will be able to put only £3,000 of the £7,000 allowance into cash, as cash maxi Isas do not exist. Therefore you are losing the tax allowance on a whole £4,000.

For those who want to invest in shares but are concerned about the present volatility, one option is to drip-feed money into the stock market slowly but regularly through a monthly savings plan.

Another is to take out a self-select Isa, on offer from major stockbrokers such as Killik & Co and NatWest Stockbrokers. These allow you to hold cash pending investment in the stock market, as well as single shares and funds. It means you can 'invest' your £7,000 by the 5 April deadline, thus using up the allowance you would otherwise lose, but keep it in cash until the stock market quietens.

One good deal is on offer from independent financial adviser Hargreaves Lansdown. Its Vantage Isa can take up to £7,000 in cash, on which you earn interest paid after a 20% tax deduction. To comply with Isa rules, you must later switch into funds or single shares.

There is a 0.5% annual charge if you keep your allowance in cash or shares, but there is no additional charge to the normal fees you would pay if you invest in funds. In fact, fund investors get a 0.3% loyalty bonus every year, too, effectively a discount off the annual fund fees. IFA group Chartwell has a similar product, but the fees are higher.

Some fund management firms have 'phasing' schemes, which trickle your money into the market slowly. For example, Fidelity will drip-feed your money into shares once a month, while Henderson allows you to phase it in every three months. Perpetual allows you to invest the cash whenever you like.

All three groups pay interest on your money before it gets switched into shares.