Savings accounts are paying mediocre levels of interest, but this has not acted as a deterrent as far as Individual Savings Accounts (Isas) are concerned.
Eight in ten opted for cash Isas in the 2015/16 tax year, while the remainder opted for stocks and shares accounts. This 80 per cent share of the Isa market in favour of the cash Isa is fairly sticky – it is broadly the same as the 2014/15 tax year, and previous tax years before that.
Overall, around 12.7 million adult Isa accounts were subscribed to in 2015/16, marginally down from 13 million subscribed to in 2014/15. Both the number of cash Isas and stocks and share Isas subscribed to fell slightly, both by 0.2 million.
In addition, average subscriptions in 2015/16 were £6,307, a 1 per cent decrease on the 2014/15 figure.
In terms of age the greatest number of savers are in the 65 and over group. Moreover, this group also has the highest average Isa savings, with a value of £38,859.
But the data, collected by HM Revenue & Customs, did show a slight uptick in the number of young people holding Isas compared to previous years.
CASH VERSUS STOCKS AND SHARES
Sticking to cash seems safe, but it is a mistake to view cash as risk-free. The effects of inflation means those who opt solely for cash risk doing themselves a disservice, as the real value of their money will gradually be eroded over time.
Moreover, history shows that over the long term, stock market returns have the upper hand over cash. Data from the 2016 Barclays Equity Gilt Study shows that British shares over the past 116 years have typically returned 5 per cent annually (including share price growth and dividend payputs), while cash has returned 0.8 per cent.
JUNIOR ISA MISTAKE
In addition, around 740,000 Junior Isa accounts were subscribed to in the fourth full financial year (2015/16) since the scheme was launched, up from 510,000 in 2014/15.
Again, the majority (497,000) are cash Isas. As Money Observer has previously pointed out, given the long-term timescale there's a clear argument for branching out into equities when investing for children.
QUICK FIRE ISA Q&A
WHAT ARE THE ANNUAL ISA LIMITS?
The rules state that you can set aside up to £20,000 in 2017/18. The annual Isa allowance must be used before the end of the tax year (5 April), otherwise you will lose it.
WHO QUALIFIES FOR AN ISA?
You can open a cash Isa when you turn 16, but for all other types of Isa you have to be at least 18 years old. You also have to be resident in the UK for tax purposes, and you cannot hold an Isa jointly with, or on behalf of, anyone else.
HOW MANY ISA TYPES CAN I OPEN IN A TAX YEAR?
Crucially, it's possible to hold a combination of various Isas, including a cash Isa, a stocks and shares Isa, a Junior Isa and an Innovative Finance (IF) Isa.
However, you can't pay into both a Help to Buy Isa and a cash Isa with separate providers in the same year. Some providers, however, offer split Isas where you have access to both types within the same wrapper.