The rate of interest paid by Cash ISAs has been dismal for the last decade. If you’re disappointed with the return you get on your Cash ISA, perhaps it’s time to transfer into a Stocks and Shares ISA instead?
The humble ISA (Individual Savings Account) was launched back in 1999, as a way for anyone over the age of 18 to save, without paying tax on interest earned or income and capital gains from the growth of the investment. The ISA concept has proven so popular that new versions have been introduced, including Junior ISAs, Innovative Finance ISAs, and Lifetime ISAs. As a reminder, you can save or invest up to £20,000 in a Cash ISA or Stocks & Shares ISA every tax year (the current 2020/21 tax year closes on 5 April and the 2021/2022 tax year begins on 6 April).
It’s easy to understand why Cash ISAs are so popular with UK savers. For starters, they are easy to set up. And there’s no lock-in period, meaning you can access your cash almost instantly when you need to. Another important feature is that Cash ISAs worth up to £85,000 are protected by the Financial Services Compensation Scheme.
There’s no sign that this popularity is waning, either. According to 2018-2019 government statistics, the number of people subscribing to Cash ISAs increased by 1.4 million from the previous tax year, while the number of Stocks and Shares ISA subscriptions fell by 450,000. In fact, more than three-quarters (76%) of open ISAs are Cash ISAs.
Clearly, most people prefer to hold cash than take bigger risks with their money. While investing in stocks and shares offers the potential for higher returns, people are often put off by the risk that they could lose all their money, and stock market volatility over the past two decades has underlined this concern. Back in 2000, the split between people opening new Cash ISAs and new Stocks and Shares ISAs was roughly 50/50, but since then, the number of people opening Stocks and Shares ISAs has fallen substantially.
People don’t like losing money, which means they are prepared to accept lower returns in exchange for the reassurance that their money is ‘safer’ left in cash. But the painful truth is that for the last decade, the majority of people who hold Cash ISAs have been losing money year-in, year out.
Last year, research from ‘Which?’ revealed that out of the 10 biggest ISA providers, six were paying just 0.01% AER (annual equivalent rate) on their instant access ISAs. The list included Bank of Scotland, Halifax, Nationwide, NatWest, RBS, and Santander. This means a large proportion of UK savers are earning just 10p for every £1,000 saved over the course of a year. With Cash ISA savers earning such a low rate of interest on their money, they’re not even benefitting from their ISA’s tax-free status. The Personal Savings Allowance introduced back in 2016 allows basic rate taxpayers to earn £1,000 of interest from ordinary savings accounts each year without paying tax. For higher rate taxpayers, the interest limit is £500.
Even those Cash ISAs paying a higher rate of interest are still losing money for their owners. Inflation measures the rise in the cost of living. Or, in other words, it tells you whether the pound in your pocket (or Cash ISA) is worth more or less than it was previously. In the UK, the Consumer Prices Index recorded the 12-month inflation rate at 0.6% in November 2020.
If you’re saving money, you want the future value of that money to grow. But if the savings in your Cash ISA are not keeping up with the rising cost of living, and are growing by less than the rate of inflation (0.6%), the value of your cash savings is effectively shrinking. We think it’s time that Cash ISA holders asked themselves whether it’s time to say “enough’s enough”, and put away their fears of investing in the stock market.
Whether you decide to call “time” on your Cash ISA really depends on what you plan to do with your ISA pot, and when you need it. If you expect to withdraw your ISA savings within six months or a year, then investing might not be the best option. Stocks and shares are best considered as long-term investments that you are prepared to hold onto for years. This way, your money stands a better chance of overcoming any short-term periods when markets are not doing so well. Shares tend to yield more impressive inflation-beating returns over the long-term.
Investing in stocks and shares doesn’t have to be intimidating. We have a dedicated specialist investment team that can make sure your Stocks and Shares ISA matches your own personal attitude towards risk, and that your money is invested with your personal needs and objectives in mind. This means helping you to use your annual ISA allowance most effectively, as well as building a Stocks and Shares ISA managed in a way that you feel most comfortable with. Our team will also regularly review your portfolio to make sure your investments remain on track.
Under current ISA rules, you can transfer your savings into the same or a different type of ISA without losing any of the tax benefits you have already accrued, and arranging a transfer doesn’t affect your annual tax-free ISA allowance of £20,000. So, it’s no problem to transfer your savings from your Cash ISAs into a stocks and shares version.
But don’t just withdraw the money in your Cash ISA, because if you do, you’ll lose the tax benefits. Instead, you need to contact your current ISA provider (or providers) to request an ISA transfer, or we can arrange to do that for you, as well as finding the Stocks and Shares ISA provider that best suits your investment needs. ISA transfers should take no more than 30 working days.
Cash ISAs used to be a great way to save for the future, but money only grows if you put it to work. Nothing ventured nothing gained, as they say. The good news is that you don’t have to settle for earning next to nothing on your savings – there are plenty of ISA options available that offer the potential for higher returns, while still keeping all of the tax benefits already gained.
If you are interested in discussing your ISA or investment strategy with one of our experienced financial planners, please get in touch here.
This content is for information purposes only. It does not constitute investment advice or financial advice.