Annual income on typical Cash ISA more than halved

With the Bank Rate now standing at 1%, and the average rate on a Cash ISA now down to 2.1%, Fidelity International is suggesting income investors, who have built up significant sums of money in their Cash ISAs in the last decade, may want to consider the new opportunity to roll their existing Cash ISA holdings into Stocks & Shares ISAs where they can get a higher level of income.

By the end of the last ISA season, some £142bn was held in Cash ISAs. At that time, the average interest rate on cash ISAs was 4.8% which means someone making the average investment of £2,200 in a Cash ISA would have seen a projected annual income of £105.82. Now, this will have fallen to just £46.20.

However, since 6 April 2008 it has been possible for holders of cash ISAs to transfer money saved in their Cash ISA to Stocks & Shares ISAs. The new rule applies retrospectively so that investors can transfer some or all of their Cash ISA money from previous tax years without affecting their annual ISA investment allowance.

Rob Fisher, Head of UK Personal Investments at Fidelity International, says, "Everyone needs to retain monies on deposit of course, but for people relying on interest to provide an income, cash is no longer offering attractive yields. When interest rates were high, investors in Cash ISAs could have received a relatively attractive income, tax-free, for little to no risk. Now, anyone who wants to maintain this level of income from their ISA investments will need to consider taking on a little more risk."

"One option to consider is taking advantage of last year's rule change and transferring Cash ISA money into Stocks & Shares ISAs. While not for everyone, income-seeking investors thinking of doing this can choose from a variety of investments with different levels of risks, such as corporate bond funds and equity income funds.

"Clearly, the jump from Cash to Stocks & Shares ISAs is significant and investors will need to make sure that they understand exactly what they are putting their money into and the risks involved. However, for those that want to maintain their level of income, this course of action may well be a solution to their problems."

FIF MoneyBuilder Income Fund, which pays a monthly income and is currently yielding 5.5% invests primarily in sterling-denominated corporate bonds plus some Government bonds. Charges are 0% initial and 0.8% annually.

FIF Enhanced Income Fund is a UK equity income fund that allocates to around 40-60 high yielding stocks - it also generates additional income through covered call options. Total yield is currently around 7.1%. It has a reduced initial charge of 3.0% (until 30 April 2009) and an annual management charge of 1.5%.

Both funds are available for ISA investment, including transfers from cash ISAs.