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Introduction to ISA

13. What kind of return can I expect from an ISA investment?

13. What kind of return can I expect from an ISA investment?

A cash ISA will not return more than about 4.25% at current rates and the future returns will be linked to future interest rates. You may choose a high-paying home for your cash ISA one year only to find that the provider pays a less competitive rate the next year, so it pays to shop around. There will be no capital gains or losses.

A growth ISA will be invested in stocks and shares, usually through a collective investment like unit or investment trusts. Most growth ISAs have failed to live up to their name in the last three years as markets have fallen. According to Micropal, £1,000 invested in even the top 50 performing ISAs three years ago is now worth just £727.

However, ISAs should be viewed and retained as long-term savings and holding over a long period should provide excellent growth. Micropal have also calculated that the annualised return on the FTSE All-share Index over the past 25 years has been 12.8%. Although past performance should not be taken as a guide to the future, an ISA that mirrored that average level of performance would double in value every 5.7 years.

An income ISA can be invested in government stocks (gilts), corporate and other bonds or shares of companies paying a substantial level of dividends. There is a wide range of income-orientated unit or investment trusts available. Income rates of 4% to 8% can be achieved. Capital gains on income funds invested in equities add to the total value but any losses can offset the income.

However the income is not guaranteed and the reason for the wide range of rates is that, as the rate increases, so does the capital risk. The safest income unit trusts are thus invested in low-risk gilts or AAA-rated bonds which offer the lowest rates of income. The highest-paying are invested in lower-grade corporate bonds providing a higher rate. Individually, these carry a greater risk of a falling price or even complete default although the unit trust will only have a small part of its total portfolio in each bond.

Over time, leaving the income to accumulate within the ISA will compound its value. Alternatively, taking the interest or dividends out tax-free each year will provide an additional income and many income funds offer regular monthly or quarterly payment facilities, particularly useful when you come to retire.

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