Dash from cash warning
THE dash from cash is accelerating as savers increasingly prefer to gamble on the stock market instead.
Britons now hold tens of billions of pounds more in stocks and shares Isas than in cash Isas, thanks to rapid stock market growth and rock-bottom interest rates.
However, you could be taking on too much stock market risk and shopping around may get you a better return on cash than you think.
CASHING OUT
The total amount going into cash Isas fell by almost £20billion in the 2016/17 tax year, with savers paying in £39.2billion, a sharp drop from £58.7billion the year before.
The number of accounts opened fell more than 15 per cent from 10.1 million to 8.5 million, according to new figures from HM Revenue & Customs.
In total, a massive £315billion is now invested in adult stocks and shares Isas, easily beating the £270billion in cash.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says this reflects the fact that the stock market has produced superior long-term returns and that stocks and shares investors tend to hold on for longer, compounding their gains.
The personal savings allowance, which permits basic rate taxpayers to take the first £1,000 of interest on savings free of tax (£500 for higher rate taxpayers) has also hit demand for cash Isas. “Snubbing cash Isas could backfire as neither low interest rates nor the personal savings allowance are necessarily a permanent fixture,” he says.
If interest rates do rise, those with larger savings pots may breach those personal allowance limits and start having to pay tax again. “Don’t give up on cash Isas,” Cox says.
POORLY RATED
The average easy access cash Isa now pays a dismal 0.64 per cent, according to MoneyFacts.co.uk, while the average five-year fixed rate cash Isa pays 1.68 per cent, down from 3.89 per cent five years ago.
With consumer price inflation running at 2.6 per cent in the year to July, savers are seeing their money eroded in real terms.
Richard Stone, chief executive of The Share Centre, says cash is actually paying a negative rate of return: “Your savings are losing their purchasing power over time and if inflation climbs even higher the problem will only become more exaggerated.”
By comparison, a simple stock market tracker following the fortunes of the FTSE 100 would have returned 12 per cent over the past year, and 55 per cent over five years. “No wonder savers are choosing stocks and shares over cash,” Stone adds.
THAT’S CHAMPION
Figures from Fidelity International show that somebody who had deposited £5,000 a year into the average cash account in each of the last 10 years would have only £50,619, a total return of just 1.24 per cent. The FTSE All-Share would have given them £81,015.
However, Anna Bowes, director at the savings advice service SavingsChampion.co.uk, says that people who shopped around for a leading fixed-rate bond each year would have fared notably better.
“If you had chosen the best oneyear fixed rate bond each year your £50,000 would have grown to nearly £58,500, a total return of around 17 per cent, with none of the risk of investing in the stock market.”
Somebody who deposited a single lump sum of £50,000 into the best one-year fixed rate bond and switched the initial deposit plus gross interest each year would have £70,800 after 10 years, a return of over 41 per cent.
Virgin Money offers a best buy oneyear fixed-rate cash Isa paying 1.30 per cent on £1 and above, and 2.15 per cent over five years, both available online only.