Savers are turning their backs on cash Isas, with figures from UK Finance, the trade association, showing that £1.5 billion was withdrawn in October.
For regular readers of Money Observer’s weekly savings update, there are sound reasons why cash Isas are being given the cold shoulder. Below we run through three reasons why Britain’s most popular type of Isa account has lost its attractions.
Personal savings allowance
As we reported in September, according to new data released by HM Revenue & Customs the overall total amount of money invested in stocks and shares Isas overtook the amount deposited in cash Isas, at £315 billion compared to £270 billion.
The number of cash Isa accounts subscribed on an annual basis fell by 1.6 million, from 10.1 million in 2015/16 to 8.5 million in 2016/17.
One of the big drivers behind this has been the introduction of the personal savings allowance, 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).
Since the personal savings allowance came into effect last April, the cash Isa tax break has become less relevant. Savers can now have £100,000 in a taxable account offering 1 per cent interest and will not have to pay a single penny of tax.
Rise of the challenger banks
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 either been sitting on their hands or worse still cutting rates, despite the rise in the base rate earlier this month.
According to Charlotte Nelson, a finance expert at Moneyfacts, in the month of October both the average easy access account and easy access Isa rates fell for the first time since April. Nelson points out that banks moved to cut rates ahead of the widely expected rise in the base rate in early November, in order to ‘minimise any subsequent rate increases.’
She adds that since interest rates were restored to 0.5 per cent, banks have been slow to announce changes and many are refusing to pass the full rate rise on. ‘This all boils down yet again to the main banks simply not needing savers’ funds. To make matters worse, challenger banks that put their rates up and down on a regular basis seem not to use base rate as a marker,’ says Nelson.
‘Savers had hoped that the rate rise by the Bank of England would inspire the banks to start offering a better return on their accounts. However, the reality is that savers are still going to have to work as hard as ever to get the best possible deals.’
Savers turning to investing?
In the 2016/17 tax year the number of people subscribing to stock and shares Isas increased to 2,589,000, from 2,539,000, reversing the trend of falling subscriber numbers in the last few years.
This indicates that savers have become fed up with the mediocre, to put it kindly, amount of interest on offer and have decided to dip their toe into the stock market.
But those who enter the market today risk buying towards the top, given that financial markets have enjoyed a good run over the last eight years since the end of the financial crisis.
This has led some to adopt a more cautious stance. For example, according to research carried out by Legg Mason, the fund manager, a third of of the UK’s leading wealth managers have warned they are holding cash across clients’ portfolios in anticipation of a market correction.
But others, including Nick Train, the respected fund manager, are more optimistic. In an interview with Money Observer in September Train explained the technological boom is ‘10 years old and has only just started getting going’, which is why he thinks we are at the ‘beginning of a fully-fledged bull market in digital technology.’
He adds: ‘It is 10 years young, and when you look back at history some bull markets lasted a very long time. The railway rally, for example, lasted 50 years.’
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