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Low risk investing is a better option than a 1% 5-year fixed cash isa

Would you lock money away in a cash Isa for five years at 1%? Surely, it’s better to pick a lower risk investment instead, says SIMON LAMBERT

Would you lock your money away for five years in a cash Isa paying 1 per cent?

There’s been a depressing regularity with which I’ve asked similar questions since the financial crisis, but never has the rate of return for long-term saving been so low.

Now, in what I sincerely hope will be the nadir for the sorry savings market of the past decade, we have reached the point where a five-year fixed rate cash Isa is launched at a pitiful 1 per cent – and manages to be one of the best deals on the market.

Hoping for a return that can beat a 1% five-year fixed rate cash Isa, but don’t want to go all in on the stock market? There are funds and trusts that can provide a lower risk answer

The latter point is important to note before I say anything else about Leeds Building Society’s new five-year cash Isa, nonetheless I couldn’t help but feel it came on a bit Dr Pangloss (Voltaire’s famously optimistic character in Candide) when it came to trumpeting the offer at launch.

Matt Bartle, Leeds’ director of products, said: ‘With so much in life seeming more uncertain than usual, more people may be looking for products which offer an improved return if they’re able to lock their money away for a longer term, in return for the security of a guaranteed rate.

‘Those investors who prefer to plan ahead and build a nest egg can take advantage of our new tax-free Isa to help them meet their savings goals.’

The sentiment is noble but let’s face it, it won’t be the Isa and its ‘improved return’ doing the heavy lifting on meeting your savings goals here – it will be what you manage to set aside.

Stash away your maximum £20,000 Isa allowance for the year in this account and you could earn £200 in interest.

Over the full five-year lifetime of the Isa, compounded gains from interest being paid into the account would amount to about £1,025.

That’s better than nothing, but it’s a far cry from the £3,230 of interest you could earn over an account’s lifetime on £20,000 when five-year fixed rate cash Isa rates stood at 3 per cent not that long ago.

Yet, we are where we are. And, as I noted, Leeds is being generous enough with its interest rate to get within a whisker of the top-paying 1.1 per cent five-year fixed rate cash Isa from Shawbrook Bank and slot into joint second place spot in our savings tables.

More pertinent, is the question of whether if someone has a pot of money they can afford to lock up for five years, shouldn’t they invest it instead?

Among the chief reasons for not investing money are that it is a rainy day fund, or may be needed in full in the short-term, but if you are salting it away for half-a-decade in most cases this wouldn’t apply.

So why not invest it? For many who choose the lousy returns but relative safety of cash the answer comes down to a question of risk.

The gyrations of the stock market make investing seem too volatile and risky a proposition.

However, it is possible to dial down that risk substantially from the shock and awe figures that hit the headlines – and it can be done cheaply and easily.

Savers can switch to being low-risk investors by using one of the funds and investment trusts that aim to protect their money first and foremost and then deliver a positive inflation-beating return over the medium to long-term.

These offer a simple, accessible and inexpensive place to invest some money spread across shares, bonds and other assets, in such a way that when the stock market crashes, you should get a good level of protection from the worst of the falls.

The flipside to taking less risk is that you won’t profit fully when shares are surging upwards, but if you were eyeing up a 1 per cent five-year fixed rate Isa instead then going all in on the stock market probably isn’t for you anyway.

A number of these funds and trusts have a robust track record of doing what they say they will when times turn tough. There’s no guarantee they will repeat that feat – past returns being no guide to the future and all that – but the long-term players here have reputations to protect.

Investment trust Ruffer (RIC green line) has been behind and ahead of the FTSE All-Share's total return at times since 2004 but delivered a less volatile ride than the stock market

Investment trust Ruffer (RIC green line) has been behind and ahead of the FTSE All-Share’s total return at times since 2004 but delivered a less volatile ride than the stock market

Our reporter George Nixon looked into some low-risk Isa investing options here for savers seeking better returns. Among the names recommended were Vanguard’s cheap LifeStrategy trackers that come with simple percentage of shares and bonds risk-based levels.

My contribution to that was to name two investment trusts I am happy to hold in my portfolio for a chunk of money I’d like a better return than cash on but not too much risk with: Ruffer and Personal Assets.

Both have good long-term records of riding out storms better than most rival funds and trusts and making an inflation and cash interest rate-beating return over the medium to long-term.

As ever, do your own research on these or any investments before buying, make sure they are right for you, and seek professional independent financial advice if you need it.

But if you are thinking of a 1 per cent five-year fixed rate Isa for a pot of money that you can afford to lock away, at least consider a low risk investment trust or fund instead.

It won’t shoot the lights out, but it’s got a much better chance of beating inflation and then a bit.



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