However, as it is now over three years since the UK base interest rate was changed to its all-time lowest level of 0.5 per cent, the question is how can people use their Isa tax allowance effectively.
A snapshot of current investor sentiment around Isa investment provides some interesting insights. Despite a difficult environment for investors, early findings show that stocks and shares Isas have grown in popularity among UK investors, with 77 per cent of respondents saying that they had invested in this type of Isa in the last year compared to 53 per cent who have invested in a cash Isa.
This positive sentiment to stocks and shares Isas will have been helped by the decision to index Isa limits each year against inflation. Initially this was in line with the retail price index but from 6 April 2012 onwards the limit will be linked to the consumer price index. In September 2011, the CPI figures rose to their highest levels since 2008 and as a result, the Isa allowance for the 2012/2013 tax year will be increased by £600 to £11,280.
For now the current Isa limit is £10,680 and investors have the option of investing £5340 into a cash Isa and utilising the remaining limit in a stocks and shares Isa. Alternatively, they can choose to invest the entire £10,680 in a stocks and shares Isa.
The rates being offered on cash Isas across the market currently range from between 1.75 per cent up to around 3 per cent while on the other side of the coin, the volatility continuing to plague financial markets combined with the ongoing eurozone crisis provide both opportunities and risks for people considering stocks and shares Isas.
Investing in a cash Isa could be deemed the safer option compared with a stocks and shares Isa, as any form of stockmarket-based investment carries a degree of risk. That said, there is a wide range of investment opportunities available for a stocks and shares Isa – including both UK and international equities, unit trusts, Oeics, Reits and exchange traded funds – so investors can balance this risk with the help of a diversified portfolio.
On reviewing the equity and fund portfolios a snapshot of customers are currently holding in their Isas, they certainly appear to be taking a diverse approach to their Isa investments, deciding to mix risk with income across a variety of markets.