Regular readers of this column will know we are not entirely (or certainly not universally) in favour of Cash ISAs simply because the balance of interest rates versus inflation means you can effectively be ‘losing’ money by having many thousands sat in an ISA ‘doing nothing’ as well as letting inflation eat it away.
Saving is a good thing but having significant sums in an ISA or savings account will see the purchasing power of your Pound diminish in real terms when inflation is higher than interest rates.
Even when it is the other way around, the amount you ‘make’ is not necessarily significant – compared to the potential elsewhere.
But there was a furore last week when it emerged City of London firms had been lobbying Chancellor Rachel Reeves to scrap Cash ISAs and curb the tax breaks on them, since you may currently invest up to £20,000 per year in an ISA tax free.
The big financial companies argued that the almost £300billion in Cash ISAs could provide better returns for savers if it was invested in the markets, while supporting the City’s diminishing Stockmarket.
The Government has NOT said it is planning this, with the Treasury simply saying it keeps ‘all aspects of savings policy under review’. There are also questions on how such a thing could be implemented.
We don’t disagree with the sentiment, since we have long suggested clients with significant sums to invest would in all likelihood see a better return if at least some is was invested in Market ISAs or other financial products such as pensions.
That said, is it right to dictate to people where they may or may not save or invest money? There is always a degree of risk investing in fluctuating assets and while longer term investments typically tend to do better, plus clients can choose a preferred risk level, it can’t be denied the risk is there. However, Cash ISAs may be forced to issue risk warnings to make savers stop and think and noting the poorer outcomes savers are likely to enjoy.
Another side of the coin saw a recent letter from the chief executive of the Building Societies Association (BSA) urging the Chancellor to keep the Cash ISA.
It said they are an ‘important source of funding’ for banks, building societies, credit unions and other providers, as the deposits can be used to fund loans to households and businesses which use your money and make a profit from it and where these savings institutions take an average 2%pa for themselves from your cash.
The BSA argued scrapping it could make mortgages more expensive and reduce availability of loan products.
So not quite as simple as the City might wish us to believe, though the assertion that more cash from ISAs funnelled into markets would help to stimulate economic growth and boost the UK is a valid one.
Cash ISAs were introduced in 1999 and data from HMRC shows up to £431bn was held in stocks and shares ISAs in 2022-23, compared with £294bn in Cash ISAs. Market ISAs can also have low risk bonds etc too of course.
Data from investment platform Vanguard, as reported by This Is Money, suggests an ISA pot of £10,000 at the end of December 1998 would have risen to just over £19,000 in the past 26 years, a 90% increase when not adjusted for inflation.
It said the same £10,000 in a globally diversified portfolio, in this case the FTSE All-World index, would have increased by more than 650% to more than £75,000.
With adjustment for inflation, the Cash ISA spending power over 26 years falls to under £5,000, while the portfolio investment stands at £65,000.
Yes it does seem a ‘no brainer’ but of course times can be volatile too (and interest on Cash ISAs disappear!) and the timing may be somewhat fortuitous. 26 years is a long investment period but shorter terms prove the same point too as interest has been so low and global markets rather rewarding.
Nonetheless we would agree that such investment products will typically give a better return but they may not be right for everyone and depend on your individual circumstances. Remember, you don’t have to be all one thing or another and you learn better by personal experience.
As ever, please do seek sound investment advice from an Independent Financial Adviser (IFA) such as ourselves before committing to any one investment plan.
