Escaping poor cash savings rates

I am risk-averse and retain my non-pensions savings in a cash Isa, the value of which has been eroded over the past five years. I am keen to earn more on my savings by switching some into stocks and shares, but I'm worried the market has peaked. Even if it is still worth investing in shares, will the transfer not incur punitive charges?

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Danny Cox, head of financial planning at Hargreaves Lansdown

Cash Isa transfers to stocks and shares Isas are increasing. Investors are attracted by income yields of around 3.5 per cent to 4 per cent, far in excess of cash deposit interest rates, and with the potential for capital growth. However, you have to be comfortable with the downs and ups of stock market investing before taking the plunge. If the natural rising and falling of markets will keep you awake at night, investing is not for you.

Traditional wisdom says the longer you invest in the market the greater the probability your returns will beat those from cash. The probability of beating cash is 75 per cent after five years, rising to 90 per cent over 10 years and 99 per cent over 18 years, according to Barclays.

The UK's FTSE 100 has not quite recaptured its previous peak and looks reasonably valued compared to its historic range. But if you're worried about valuations, you could keep some of your Isa assets in cash, and drip-feed the remainder into stock markets over time.

In terms of the mechanics, transferring money from a cash Isa into a stocks and shares Isa is easy and low cost. Once you have chosen a stocks and shares Isa provider they will do everything for you. Transferring is usually free and the charges you pay will depend on the investment supermarket's charging structure and how you invest.

My recommendation for first-time investors would be to invest in a fund rather than individual shares. A fund invests in between 40 and 80 individual shares, meaning you have a spread of investments and avoid having all your eggs in one basket. The fund manager also makes all the buying and selling decisions for you. Equity income funds are a firm favourite for first-time investors as they tend to be the least volatile. But you need to give them time.

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Justin Modray, founder of Candid Financial Advice

Provided your cash Isa is a variable rather than a fixed-rate account, there should be no penalties to transfer out. And, given that there are several low-cost shares Isa platforms available these days with no initial charges, the cost of transferring should be negligible to nil.

By far the bigger issue is whether transferring part of your cash Isa across to a shares Isa is the right move for you. It all boils down to risk. If the thought of losing money makes you very nervous, stick to cash. But if you think you could stomach potential shorter term losses with a view hopefully to make better-than-cash returns over five to 10 years, the transfer is worth considering.

I share your concern that stock markets have had a good run and could hit the buffers some time this year or next. However, these things are notoriously difficult to predict and we could be sitting here in a year's time with markets having raced further ahead. I would therefore take a long-term view and avoid trying to call markets in the short term. You could initially hold the transfer as cash within a shares Isa and then drip feed it into the market over a number of months, reducing the pain if there is a downturn in the short term.

If you decide to transfer, you'll need to consider which shares Isa provider to use and which investments to hold. Shares Isa platforms are generally a sensible route since they offer a very wide choice of investments including lower cost fund versions than usually available direct from fund managers themselves.

Cheaper options include Cavendish Online and Charles Stanley Direct, who both charge 0.25 per cent a year. For larger portfolios, platforms with fixed annual charges, such as Alliance Trust Savings and Interactive Investor tend to come out cheaper.

As for investments, you might consider funds over individual shares as they offer a simpler way to spread risk. Spreading your money across a few different asset types that tend not to all move in the same direction at the same time, such as stock markets, corporate bonds, property and commodities could also help reduce overall risk. Perhaps start by looking at low-cost tracking funds from the likes of Vanguard, HSBC, Fidelity and BlackRock.

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