3 reasons why the appeal of a cash ISA is falling right now

In previous years, a cash ISA was seen as a worthwhile savings product. It helped an individual to avoid the tax which was paid on the interest received from cash savings, while also potentially offering a better rate.

Nowadays though, the appeal of a cash ISA has diminished significantly. Tax changes, lower interest rates and a growing world economy mean that they may not be worth having in future.

Tax changes

As mentioned, a cash ISA had the added benefit of helping an individual to avoid tax. Interest received within an ISA is not subject to income tax, whereas the interest received on cash balances in bog-standard savings accounts is.

But tax changes mean that the first £1,000 of interest received from savings accounts is now no longer subject to tax. Since interest rates in easy-access accounts are little more than 1.5% at the present time, this means that an individual would need to have around £67,000 in cash savings in order for a cash ISA to be worth opening from a tax perspective. Since most individuals are unlikely to have that amount in cash, a simple savings account could be just as effective as a cash ISA.

Inflation

While interest rates have risen from their historic lows, they are still significantly lower than the rate of inflation. In fact, inflation currently stands at 2.4%, which means that a cash ISA’s return is likely to be negative in real terms.

A number of years ago, higher interest rates meant that the real return from a cash ISA may have been much more appealing. But with Brexit ahead and the prospects for the UK economy being uncertain, a loose monetary policy may remain in place in the medium term. This could keep the returns well below inflation, meaning that any amount invested now is likely to have less spending power in future years.

Growth potential

While the prospect of a full-scale trade war and higher US interest rates are risks facing the world economy, the reality is that it is performing relatively well. There are significant growth opportunities across the developed and developing world, with companies in the FTSE 100 and FTSE 250 providing investors with the opportunity to benefit via share ownership.

Certainly, volatility has been high in stock markets of late, and this situation could continue in the near term. But it may also provide a buying opportunity which offers a more appealing risk/reward opportunity for the long run.

Of course, having some cash savings is always a good idea. They can provide peace of mind, as well as flexibility should the money be required for unforeseen circumstances. But the idea of tying-up a large proportion of an individual’s wealth in a savings account or in a cash ISA while interest rates are so low and the prospects for the world economy are relatively bright does not seem to be logical. As such, the appeal of a cash ISA appears to be relatively low at the present time.

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