Cash ISA in­vest­ing falls as savers move to boost re­turns

We ex­plain why non-ISA cash sav­ings ac­counts could be prefer­able in the cur­rent cli­mate

Shares - - CONTENTS - Tom Selby, Se­nior An­a­lyst, AJ Bell

The latest of­fi­cial statis­tics on ISA sav­ing in the UK paint a fas­ci­nat­ing pic­ture of a na­tion shift­ing away from cash ISA prod­ucts of­fer­ing fee­ble re­turns.

Sav­ing in cash ISAs fell off a cliff, with the num­ber of ac­counts opened down from 10.1m in 2015/16 to 8.5m in 2016/17. The amount of money paid into ISAs – re­ferred to in the jar­gon as ‘sub­scrip­tions’ – dropped by a whop­ping £19.5bn dur­ing the same pe­riod, from £58.7bn to £39.2bn.

So why ex­actly has this huge shift oc­curred? There are a cou­ple of ob­vi­ous fac­tors.

Firstly, the in­ter­est rate set by the Bank of Eng­land con­tin­ues to trun­dle along at 0.25%, drag­ging down the re­turns on of­fer through cash prod­ucts.

Se­condly, the in­tro­duc­tion of the per­sonal sav­ings al­lowance in 2016/17 will, for many peo­ple, have tipped the tax bal­ance in favour of non-ISA ac­counts.

To re­cap, the sav­ings al­lowance al­lows basic-rate tax­pay­ers to re­ceive £1,000 of cash in­ter­est tax-free ev­ery year (re­duc­ing to £500 for higher rate tax­pay­ers and £0 for ad­di­tional rate tax­pay­ers).

The mar­ket-lead­ing* one-year cash ISA rate is cur­rently of­fered by Vir­gin Money and stands at 1.3%. Com­pare this rate to the best one-year fixed rate of 1.95% paid by Atom Bank. If you’re look­ing for a better known brand, York­shire Bank pays 1.5% on its one-year fixed rate ac­count.

Savers would be better off us­ing up their in­ter­est al­lowance first be­fore stash­ing any spare money in a cash ISA.

In­deed, even for money over and above the sav­ings al­lowance – tax­able in a sav­ings ac­count but not in an ISA – the cash ISA can still lose out. If we take the rate of­fered by Atom Bank, while the gross rate of 1.95% drops to 1.56% for a basic rate tax­payer af­ter tax, it still com­fort­ably beats the best one-year Vir­gin Money cash ISA rate of 1.3%.

While de­mand for cash ISAs has un­sur­pris­ingly fallen, 2,589,000 peo­ple paid £22.3bn into stocks and shares ISAs dur­ing 2016/17, a mar­ginal in­crease on 2015/16. With Con­sumer Prices In­dex in­fla­tion stand­ing at 2.6%, it’s no sur­prise in­vestors are turn­ing to the stock mar­ket – ei­ther by in­vest­ing directly in com­pa­nies or through a fund man­ager – in a bid to pre­vent ris­ing prices erod­ing the real value of their money.

Clearly we can’t be cer­tain on what will hap­pen in the fu­ture, but with in­ter­est rates un­likely to shoot up quickly and the sav­ings al­lowance re­main­ing in place it’s hard to see de­mand for cash ISAs pick­ing up any time soon. *All ISA and sav­ings ac­counts rates quoted from MoneySaving­Ex­pert, cor­rect on 31/08/17

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