Savers are increasingly turning away from Cash ISAs as the impact of low returns and tax changes becomes clearer.
Putting your money into a Cash ISA can be costly – and it appears that more and more UK savers are taking note.
The latest figures from HMRC show that contributions to Stocks & Shares ISAs rose by more than 5.5% to £22.3 billion in the last tax year. Cash ISA subscriptions, on the other hand, fell by a staggering 33% to £39.2 billion.1
Add in all existing ISAs, and the shift is even more marked: for the first time since ISAs were launched, the total amount of money in Stocks & Shares ISAs is greater than the total deposited in Cash ISAs; 18 years after ISAs were founded, there are signs that UK savers are rethinking how to make the most of their allowance.
It is not hard to see why. Inflation reached 2.9% in August.2 According to Moneyfacts, there are 1,721 savings products on the market, but none can beat the current rate of inflation – even the most generous fixed-rate bonds.3 Consequently, the real value of cash holdings is not just being eroded – it is being eroded at an accelerating rate.
For savers with their money in a no-notice Cash ISA, the returns are of course even more dismal. At 0.61%, the return on the average no-notice Cash ISA offers a third less than it did just 12 months ago – even though inflation has been going in the opposite direction. Given the latest inflation figure, that means the average Cash ISA saver is forfeiting nearly 2.3% a year after inflation.4
Saving less, losing more
Part of the shift away from Cash ISAs reflects the fact that, since April 2016, basic-rate taxpaying savers can earn £1,000 a year in tax-free interest from standard current and deposit accounts. For higher-rate taxpayers the allowance is £500. The Personal Savings Allowance, as the new allowance is called, reduced the relative advantage of Cash ISAs, which had previously been the only available source of tax-free interest. It means that basic-rate savers receiving the average no-notice account rate of 0.38% could earn tax-free interest on deposits of over £263,000.4
Of course, some savers will continue to be attracted by the opportunity to earn tax-free interest above the level of the Personal Savings Allowance. Moreover, as and when interest rates rise, Cash ISA funds will retain their tax benefits, while the amount of money on which tax-free interest can be earned will reduce. But given the economic and political uncertainties, it seems very unlikely that savings rates will rise significantly for some time to come.5
Yet the larger trend is that people are saving less overall – not simply that they are shifting savings between accounts. According to figures released by the Office for National Statistics (ONS), the savings rate – the amount that households save out of their income – fell to an all-time low of 1.7% in the first quarter of 2017.6 The ONS cited a number of causes: higher tax payments, stagnant wage growth, and rising inflation. It is sobering to think that the savings rate was 11.8% as recently as the first quarter of 2010.7
Yet despite being squeezed by the triple whammy of rising tax, falling income and mounting inflation, Bank of England figures show that savers still have more than £1.58 trillion sitting in retail savings accounts – and losing money in real terms.8
Moreover, although increasing sums have been flowing into Stocks & Shares ISAs, more than three out of four ISA accounts subscribed to in 2016/17 were still Cash ISAs.9 That trend has been consistent for many years, suggesting that a preference for cash is proving a hard habit to break, and that too many savers are still seeing cash as a solution for long-term wealth provision.
The value of an ISA with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
4 See above
8 Bank of England, August 2017
9 See above