The latest figures show that UK savers are increasingly turning away from the Cash ISA as a saving option, as the impact of low returns and the tax changes becomes clearer.
Putting your money into a Cash ISA can be costly
For the first time since the ISA was introduced, 18 years ago, there are signs that UK savers are rethinking how to make the most of their allowance. For the last 18years, the Cash ISA was king, outperforming the Stocks & Shares ISA consistently, in terms of total amount of money invested in each.
The latest figures from HMRC show that contributions to Stocks and Shares ISAs rose by more than 5.5% to £22.3 billion in the last tax year. On the other hand, Cash ISA subscriptions fell by 33% to £39.2 billion.
This is a remarkable change, but it’s not difficult to see how it has come about.
Stocks and Shares ISA Comes Into Ascendancy
Firstly, inflation reached 2.9% in August. But, according to Moneyfacts, out of the 1,721 savings products on the market, none can beat the current rate of inflation. This includes even the most generous fixed-rate bonds. As a result of this, the real value of cash holdings is being eroded at an accelerating rate.
This means that savers who have their money in a no-notice Cash ISA, are seeing somewhat poor returns of less than a third of the returns they were getting just 12 months ago.
The 0.61%, the return on the average no-notice Cash ISA is pitiful, despite the fact that inflation has been going in the opposite direction. What it means for the average Cash ISA saver is that they are forfeiting nearly 2.3% a year after inflation.
Tax Free Saving
Another reason for the shift away from Cash ISAs is that, since April last year (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 this is lowered to £500.
This Personal has the effect of reducing the relative advantage of Cash ISAs, which had previously been the only available source of tax-free interest.Allowance, as the new allowance is called,
In short 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.
Cash ISA funds will retain their tax benefits, if and when interest rates rise, and the amount of money on which tax-free interest can be earned will reduce. And some savers will continue to be attracted by the opportunity to earn tax-free interest above the level of the PersonalAllowance. But in the current economic uncertainty surrounding Brexit, it’s unlikely that savings rates will rise significantly in the foreseeable future.
Savers Are Saving Less
The larger trend suggest that, overall, people are saving less. Which also has an effect on the Cash ISA figures.
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
There are a number of possible causes, including higher tax payments, stagnant wage growth, and rising inflation.
Are You Losing Money
Savers have been hit by rising tax, falling income and mounting inflation. But the latest Bank of England figures show that savers still have more than £1.58 trillion sitting in retail savings accounts, which means that they are losing money in real terms. On top of this, despite the fact that Stocks and Shares ISAs are outperforming Cash ISAs significantly, three out of four ISA accounts subscribed to in 2016/17 were still Cash ISAs.
What this means is that, despite the evidence, people still have a preference for cash, and that is a hard habit to break.
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