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Isa station

I wonder whether there is life in equity Isas yet. Sales of equity Isas had fallen to such an extent that the death knell has frequently been sounded but perhaps it has been sounded prematurely. The latest figures from the Investment Management Association show that Isas sales have had net inflows for six consecutive months, reversing the trend of people withdrawing more than they were putting in.

Sales have traditionally lagged cash Isas by around four to one. Not that we should be surprised that cash would out-sell stocks and share Isas and two severe stockmarket slumps since their introduction a decade ago will have had a significant impact too.

The increase in the Isa limits could also offer continuing respite to Isa fund managers recovering from the impact of the financial crisis. I say that because the increase in the annual limit to £10,200 will be of more use to equity investors than cash savers at this juncture.

True to form, our banks are ignoring their loyal customers and the average cash Isa rate has fallen to its lowest level ever, at just 0.41 per cent. Having said that, the dismal rate is still higher than many of the rates that high-street banks pay to savers who have entrusted them with their hard-earned cash for years.

For example, Barclays’ cash Isa pays 0.1 per cent, as does Halifax’s Isa saver. Given the prominence of these two high- street names, it is probable that billions of pounds will be sitting in accounts paying diddly squat.

But even where interest rates are higher, the extra allowance will not amount to much for cash savers. Earlier this year, Moneynet, the price comparison service, crunched some numbers just to see how better off savers would be by taking advantage of the new Isa limits.

It used the Barclays golden Isa paying a 3.61 per cent. Invest the old limit of £3,600 and you would get a return £129.96 a year. Those over 50 who can now invest £5,100 in a cash Isa in this tax year would get an annual return of £184.11, a difference of just £54.15.

As I have said in this column before, if cash Isas are really going to work, the Government needs to put pressure on the bailed-out banks to offer competitive rates on all cash Isas, existing and new. That is unlikely to happen, which opens the door for equity Isa providers because equity Isas have more to offer.

One of the early reasons cited for the pick-up in equity Isa activity is the fact that people had little choice but to move up the risk ladder if they had any hope of getting a decent return. Even NS&I premium bonds were more attractive than cash savings accounts because at least you could dream of scooping the jackpot.

The timing for fund management groups could also not be much better because the majority of investors favour good news before investing, even if the shrewd snap up bargains during times of woe.

The stockmarket is riding high above the 5,000 barrier, having soared by more than 30 per cent since its March lows. The FTSE 100 has just enjoyed the best three months in its 25-year history.

It is not just equity Isas that have the chance to flourish, so too do corporate bond funds, which have more to offer in terms of tax-efficiency because of the tax credit. With the October limit changes and the raising of the allowance for all in April, we might soon be fore-casting the return of Isa season – or is that being premature?

Paul Farrow is digital personal finance editor at the Telegraph Media Group


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