The amount of money invested in stocks and shares Isas has overtaken the amount deposited in cash Isas – at £315 billion compared to £270 billion – according to new data released by HM Revenue & Customs.
This decline in cash Isa savings can be attributed to the introduction of the personal savings allowance last tax year, which allows basic rate taxpayers to receive £1,000 of cash interest tax-free each year (£500 for higher rate taxpayers and £0 for additional rate taxpayers).
The number of people subscribing to stock and shares Isas also increased to 2,589,000, from 2,539,000, reversing the trend of falling subscribers in the last few years.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says: ‘Low interest rates and the new personal savings allowance have precipitated a collapse in cash Isa saving.
‘While understandable, this may prove to be short-sighted as neither low interest rates nor the personal saving allowance are necessarily a permanent fixture of the financial landscape, though it’s fair to say both do look set to remain in place for the foreseeable future.’
He points out that these figures relate to last tax year and therefore they don’t yet include the new Lifetime Isa.
Tim Holmes, managing director at Salisbury House Wealth, says savers have finally cottoned on to the fact that cash Isas offer ‘very poor value’. He adds: ‘Having your money erode away in a cash account does little to help you save for retirement.’
Another factor at play is the fact that taxable savings accounts have for some time now been offering higher rates compared to cash Isas. This trend has been largely driven by the fact that challenger banks, who have been increasing rates, do not tend to offer cash Isas. In contrast, the older and more established banks, which on the whole do offer cash Isas, have been sitting on their hands.
Anna Bowes, director at savingschampion.co.uk, points out ‘for some savers, choosing an Isa right now will see them earn less interest even if they have fully utilised their personal savings allowance and are therefore paying tax on some of the interest.’
She adds: ‘For example, one of the best one year fixed rate bonds is currently paying 1.83 per cent gross/AER (1.46 per cent net for a basic rate taxpayer, or 1.10 per cent for a higher rate taxpayer).’
‘The best one-year fixed rate Isa, on the other hand, is paying 1.30 per cent tax free. So, in this example, someone who does pay basic rate tax on some of their savings interest and who would therefore normally look to shelter as much as possible in a cash Isa, would actually be better off with a fixed rate bond, even after allowing for the tax.’
Parents saving for their children prefer cash
A different picture, however, emerges in the Junior Isa market. While the number of accounts opened rose by 7.6 per cent in the 2016/17 tax year 71.7 per cent of money saved in them went into cash rather than the stocks and shares Isa.
According to Jason Hollands, managing director at Tilney Group, parents are doing their children a disservice – as an 18-year period is ample time to ride out the various peaks and troughs of stock markets, particularly when income-generating investments are held and the returns reinvested.
He adds: ‘While we all need some cash for a rainy day or to meet emergencies, cash is not a suitable place to park assets for the long-term as the real value will be steadily eroded by the acid of inflation and this is especially the case in the current environment of record low interest rates and inflation running above the Bank of England’s long-term target rate of 2 per cent.’
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