“Are Cash ISAs good for savings?”
Recent figures released by HMRC show that UK savers held over £300 billion in cash ISAs in 2019-20, accounting for 51% of the market value of all Adult ISA holdings.
It is likely that these numbers will have increased further during lockdown, with people unable to spend disposable income on travel or social events.
This is despite the best interest rate available on easy-access cash account being less than 0.5%, according to Moneyfacts.
With inflation on the rise (CPI annual rate is currently 1.5%), savers are now, in effect, receiving a negative real rate of interest. Meaning that the value of their cash savings is set to reduce in value over time.
This could spell disaster for those intending to use the funds for medium to long term financial objectives such as saving for a deposit or retirement.
For example, if I were to hold £1,000 in a Cash ISA earning a return of 0.5% per year for 10 years, and inflation were to remain at 1.5% during this period, the real value of my savings at the end would be approx. £905 in today’s values. The Cash ISA would have made a negative real return.
Adult ISA fund market values
Source: HMRC
What are the alternatives?
Before you decide if Cash ISAs are the right option, you should weigh up the alternatives too.
Savings: If the security of your money is important, a traditional savings account or Cash ISA may be the right option. Assuming you stay within the limits of the Financial Services Compensation Scheme, your money is safe. It will earn regular, fixed interest rate.
However, interest rates are low and can mean your savings don’t keep pace with inflation. If you’re in a position to do so, choosing products with restrictions, such as locking your money away for a defined period, can help you access higher rates of interest. Saving accounts are a good option for emergency funds and short-term saving goals.
Investing: If you’re prepared to accept some investment risk, stocks and shares ISAs in particular, might be a good option.
Money invested can deliver greater returns - particularly over the medium to long term – but this is not guaranteed. This means that your initial investment can fall, as well as rise, in value. Over the long term, investments have historically delivered returns, so a minimum timeframe of five years is advisable when investing.
If you’re focused on long-term returns, investing could provide an alternative to Cash ISAs.
Finding a home for your savings
There’s no right or wrong answer when deciding where to put your money, but it’s essential that you consider what you want to get out of it and your financial circumstances. Please get in touch to create a financial plan that considers your options, whether you have a lump sum to save or want to make regular deposits.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Equity investments do not afford the same capital security as deposit accounts. Your capital is at risk.
The value of your investment (and income from it) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
