The clear message from the new Individual Savings Account (ISA) statistics released by HM Revenue & Customs last week is that savers are running away from cash ISAs.
More than £20 billion less was saved in cash ISAs in the year to April than the previous year, a fall of more than a third. In total, 1.6 million fewer cash ISAs were opened in the financial year.
By contrast, the popularity of investment ISAs soared, with the amount of money going into stocks and shares ISAs jumping to a new record high of £22.3 billion, up from £21.1 billion, while the number of new accounts also grew.
So why are savers deserting cash in favor of investing?
The downsides to cash ISAs
The first is the fact that the interest rates on offer are simply not enough to get anyone excited about saving. According to figures from financial information site Moneyfacts published last month, the average easy access cash ISA paid just 0.62% in interest – faced with such paltry returns, it’s little wonder that savers would look to alternatives.
And then there is the fact that the personal savings allowance is now in place. This perk from the government allows all savers to enjoy £1,000 in interest from their savings before having to pay tax. By introducing tax-free returns to conventional savings accounts, the shine has been removed somewhat from cash ISAs for all but the tiny number of people enjoying even greater returns from their savings pots.
Danny Cox, chartered financial planner at Hargeaves Lansdown, said:
Low interest rates and the new personal savings allowance have precipitated a collapse in cash ISA saving. While understandable, this may prove to be short-sighted as neither low interest rates nor the personal saving allowance are necessarily a permanent fixture of the financial landscape, though it’s fair to say both do look set to remain in place for the foreseeable future.
Stocks and shares ISAs by comparison have enjoyed their biggest year ever in terms of the amount of money subscribed, despite Brexit causing a dip in an otherwise buoyant stock market. In a positive development the number of stocks and shares ISA investors also increased, reversing the trend of recent years and suggesting that more people are now turning to the stock market with their long term savings.
What about the IFISA?
It’s also worth noting the slow progress so far of the Innovative Finance ISA (IFISA), which allows people to keep their peer-to-peer investments within the tax-free ISA wrapper.
In the year to April 2016, a paltry 2,000 accounts were opened.
However, peer-to-peer firms were upbeat about the future prospects for the accounts, arguing that as firms only opened their accounts in the dying months of the financial year, this figure is not truly representative of interest in the IFISA.
Giles Cross, CMO at Folk2Folk, said:
By allowing P2P lending to be part of the ISA wrapper, investors are now benefiting from inflation beating returns without the volatility of the stock market. Since the introduction of our IFISA in July, we have seen a huge amount of interest from investors looking for an alternative income with tax free returns. In the months ahead and during the uncertain economic climate, we expect more investors to explore the opportunities the IFISA offers UK investors.
Making the most of your investing
If you do opt to take the plunge with investing, then it’s crucial that you take an active role with how your money is performing. It’s rarely enough to simply stick that money in an account and then forget about it.
Here are the five steps recommended by Chris Atkinson, head of consumer distribution at Zurich, to ensure that your investments are hitting the spot
Carry out a money health check
Don’t get complacent with your money – carrying out a regular health check is a good idea to ensure that you are well aware of any investments that aren’t performing well and whether you need to adjust strategy
The key to making the most out of your money is to diversify, spreading your funds across a range of different investments. Taking a bigger risk can result in a bigger payout, but there is also the danger of losing some or all of that money. By mixing your money across asset classes you should cover yourself.
It isn’t enough to simply stick your savings under the mattress – inflation will eat away at the value of that money, leaving you with less than you started with. Investing smartly over the long-term, as well as moving your cash savings between top accounts, is a good way to keep up with – and beat – inflation.
Keep calm and carry on
It’s easy to get carried away when the stock market performs particularly well or particularly poorly, but don’t let these results push you into knee jerk reactions. Take your time, and consider each move carefully. You may be better off to simply do nothing.
Don’t do it alone
Don’t be scared to ask for advice; it can go a long way towards helping you find the best investments for your own circumstances and attitude towards risk.
This article appeared in Forbes on 5th September 2017. Written by John Fitzsimons.