Warning as Cash ISAs do nothing for your money

THE Covid pandemic has seen money pouring into Cash ISAs from spooked investors.

Quite remarkable given the low interest rates on offer, especially when inflation is taken into account.

Negative real returns are being made by many.

Indeed, ISA savers have seen more than half a billion pounds wiped off the value of their savings in the last 12 months.

The market value of tax-free cash savings hit £316.2 billion at the end of the 2019-20 tax year after close to £50 billion was paid into new and existing accounts, according to figures from HM Revenue & Customs.

This represented a four-year high as savers opted for the safe haven of cash.

Bank of England data showed the average rate on cash ISAs between March 2020 and April 2021 was 0.46 per cent.

Meanwhile over the same period consumer price inflation was 0.65 per cent, states the Office for National Statistics.

And it has recently began to rise sharply.

Extrapolating the various figures, financial website This Is Money reveals how that tax-free cash pile of £316.2 billion would have earned £1.46 billion gross interest over the last year.

However, after inflation was accounted for, £540 million would have been wiped off that total.

It went on: “Unfortunately, for those savers not comfortable with investing as they feel they need access to their money over the next few years, there are few good options.

The best easy-access rate available is 0.5 per cent and the best easyaccess ISA 0.47 per cent.

“On fixed-rate deals, savers can earn 0.55 per cent on a tax-free one-year term or 0.71 per cent on a 24-month.”

Contrast this with balanced funds.

A Financial Samurai survey of historical returns 1926 to 2016 found that a 40 per cent weighting in stocks and a 60 per cent weighing in bonds provided an average annual return of 7.8 per cent, with the worst year

-18.4 per cent.

A 50 per cent weighting in stocks and the same in bonds has provided an average annual return of 8.3 per cent, with the worst year -22.3 per cent.

The key is figuring what combination works best for your risk tolerance and financial objectives.

It noted: “When people started losing big money during the 2008-2009 financial crisis there was mass panic because they were also losing their houses and their jobs.

“Then in March 2020, during the height of the coronavirus hysteria, many newbies who had never experienced a downturn before sold stocks.

“Knowing your risk tolerance is important. So is knowing the historical returns of different stock and bond portfolios so you better know what to expect.”

Even allowing for Covid over the past two years, balanced fund returns have done exceptionally well without giving cause for too many sleepless nights including in the spring of 2020 when, as we have said, market uncertainty was probably at its peak.

Nevertheless, this is not to write off ISAs as a whole.

If there is a medium term in mind – five years plus – then an Investment ISA probably makes sense because it means your money is working harder even at low to average risk.

Some people seem to think an Investment ISA means 100 per cent in the stock market but that isn’t the case and a portfolio can be tailored to their risk attitude. If a client takes out a Junior ISA for their kids or grand kids at birth then they have an 18-year view, which has a very good chance of riding out any ups and downs.

Meanwhile, in general, Cash ISAs should only be for the most cautious.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice