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The risks of reckless caution

31 January 2019

As ISA season gathers pace, will savers make the most of the long-term tax and investment benefits provided by their annual allowance?

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

Robert G. Allen, an American motivational speaker, made a valid point; but as political and economic turbulence continues to dominate the headlines and unsettle financial markets, his words could fall on deaf ears, especially among those savers unnerved by current events.

And that’s very relevant, as volatile markets coincide with the looming 5 April deadline to make use of this year’s ISA allowance. The more attractive valuation levels across global markets will be seen by many investors as a long-term opportunity. But other savers may be uneasy about committing money to the stock market and happier to take what they perceive as the safer option of cash. Of even more concern is the number of people who will take no action and simply lose their ISA allowance.

News that inflation fell to a two-year low of 2.1% in December would have been welcomed by those habitual cash savers, if only because, for many, it may have slowed the rate at which their money is losing value in real terms.

But recent research by Aegon suggests that many risk-averse savers are content with that. The majority of those surveyed preferred the safety of cash yielding less than 1% to riskier investments. Over half admitted that their risk appetite was low or zero and said that they would accept lower returns as the price for minimising potential losses.¹

ISA savers have largely mirrored these trends. Despite the returns on offer near record lows, three quarters of last year’s ISA subscriptions were deposited in Cash ISAs. That’s nearly £40 billion. While there was also a 28% increase in the amount invested into Stocks & Shares ISAs, it’s clear that the preference for cash is proving a hard habit to break.²

Julie Wise, Head of Tax Year-End and ISA Planning, talks about this year's tax-saving opportunity.

Latest figures from HMRC showed that savers now have over £270 billion deposited in Cash ISAs. Furthermore, over ten million Cash ISAs have received contributions in each of the last ten tax years; ample evidence that these tax-advantaged accounts are being used widely, if not wisely, as part of individuals’ long-term savings strategy.³

And that could be a costly mistake. Moneyfacts reports that the average easy access Cash ISA rate is currently 0.94%. The best rate for a five-year Cash ISA account is 2.30%, only marginally above the current rate of inflation. What’s more, that rate is less than the best available for a standard five-year deposit account.⁴ Why then are savers choosing the cash option for their ISA allowance?

“Regardless of the current turbulent political and investment landscape, failing to take measured risk is not prudent,” said Nick Dixon, Investment Director at Aegon. “Over the longer term, reckless caution is the biggest risk of all.”

Interestingly, the Aegon research revealed that concerns about making a wrong decision was the most likely reason preventing people from taking more risks with their savings and investments. That underlines the vital role that good financial advice can play in helping savers build confidence and improve their understanding of risk, in order for them to make the right long-term investment decisions.

“Your ISA allowance is a valuable opportunity to create tax-efficient income and capital for the future,” said Rob Gardner, Director of Investment Management at St. James’s Place. “Yes, the short-term outlook is uncertain; but those seeking long-term financial security need to have the discipline to keep investing in their pension, ISA and other allowances each year to move another step closer to that goal.”

 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank, building society or Cash ISA.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

 

¹ Aegon, January 2019

²,³ HMRC, Individual Savings Accounts (ISA) statistics, September 2018

⁴ Moneyfacts, January 2019

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