At a glance
- Savings in Cash ISAs are currently losing value in real terms after inflation is taken into account.
- As your Personal Savings Allowance allows you to earn up to £1,000 of interest on cash tax free, you may not need a Cash ISA. This means you could use more of your annual allowance to invest in a Stocks & Shares ISA, which is likely to earn you greater sums over the long term.
- A St. James’s Place Partner can help you find the best balance of cash savings and stocks and shares investments to suit your financial goals.
At the time of writing, the best rate you can get on an instant-access Cash ISA is 0.67%.1 You would be forgiven for thinking that it is at least ‘something’. However, while your balance will still grow on paper, with inflation reaching 4.9%2 by January 2022, the spending power of your money will actually be reducing with each year that passes.
Despite low savings rates, Cash ISAs do remain hugely popular. In the 2019/20 tax year (the last year for which figures are available), Cash ISAs accounted for 75% of all accounts, with savers paying into 9.7 million plans, 1.2 million more than the previous year.3
Cash ISAs are certainly convenient – your money is easily accessible, so you have funds on hand in the event of an emergency, and it’s sheltered from tax.
But that doesn’t necessarily mean it’s the right home for all your savings. By ploughing too much money into cash accounts, savers could miss out on vital growth that will not only shield them from the rising costs of living, but also go a long way in helping them achieve their financial goals.
Investing in a stocks and shares ISA is higher risk, in so far as the value of your savings will dip when markets fall; however, over time, you have the potential to earn more than if you’d only kept your money in cash. And, of course, you still won’t pay tax on the gains within your pot.
So, as the tax year comes to a close and the time comes to make the most of your £20,000 annual allowance, you may want to rethink whether a Cash ISA is the right home for your money.
How long have you had your Cash ISAs?
A good starting point is to look at your current Cash ISA holdings and ask yourself whether you have had them for more than five years.
If the answer is yes, then cash may have unwittingly become part of your long-term investment strategy. Holding your wealth in cash is the right thing to do if it’s money you might need in the short term. But over the longer term, if your Cash ISA savings aren’t keeping up with inflation then your future spending power is reducing. And that could be putting your future financial security at risk.
Do you even need a Cash ISA?
It’s also worth reconsidering how important Cash ISAs are in your overall financial plan. The introduction of the Personal Savings Allowance (PSA) in 2016 means that basic and higher-rate taxpayers can earn tax-free interest up to £1,000 and £500 respectively from money held in cash accounts.
That means basic-rate taxpayers can save up to £525,000 and higher-rate taxpayers £262,000 before they need to concern themselves with tax on interest (based on a savings rate of 0.19%, the current easy-access average).4
Those are both huge sums, so does it really make sense for your emergency savings to eat up your ISA allowance? By taking advantage of the PSA, you can potentially free up more of your ISA allowance to invest in stocks and shares.
Of course, with Cash ISAs, your interest will always be free of capital gains and Income tax – and if interest rates rise, the amount you can save in standard accounts before income becomes taxable will reduce. However, with little chance of a significant rise in the future, it’s one more reason to think about whether you’re making the most of your ISA allowance by using them as a home for your emergency cash.
The benefits of Stocks & Shares ISAs
To really maximise the tax perks of ISAs, it’s usually best to invest in assets with the potential of generating long-term income and capital growth, and that means stocks and shares.
So before the end of this tax year, have a discussion with a St. James’s Place Partner about whether Stocks & Shares ISAs should be playing a bigger role in your financial planning. It might mean investing in one for the first time or diverting some of your current Cash ISA savings into stocks and shares.
Where appropriate, it is possible to transfer money out of existing Cash ISAs into a Stocks & Shares ISA without it reducing your allowance for the current year.
Increasing your exposure to the stock market can be daunting. But this is where advice can really help. By talking to your adviser about your short, medium and long-term financial goals, they can help you work out how much you need to keep in easy-to-access cash accounts and how much you can afford to invest in stocks and shares to help you achieve your longer-term goals.
They can also help you find investments that match your risk profile and investment horizon, to ensure your portfolio doesn’t keep you awake at night.
If you have multiple ISA accounts, you may also find it easier to keep track of them if you consolidate them into one plan.
If you transfer as cash you’ll be out of the market until the transfer is complete. You won’t lose out if the market falls but your money won’t be subject to any income or growth if the market rises in this period. If you transfer a fixed rate cash ISA before the end of the term, you may have to pay a fee.
If you’re transferring funds from a Stocks and Shares ISA you’ll remain invested until the transfer. You’ll be unable to switch or sell these funds while the market falls or rises during this time.
You should also be aware that your current provider may charge exit fees.
To ensure your savings are working as hard as they can for you now and in the future, get in touch with us.
The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
1 Best ISA rates, Moneyfacts.co.uk, figures correct on 13 December 2021
2 Inflation and price indices, Office for National Statistics, January 2022
3 Commentary for annual savings statistics: June 2021, gov.uk, 15 June 2021
4 Moneyfacts.co.uk press data, figures correct on 13 December 2021