Could the cash ISA be about to disappear?
Recently I’ve written about the trap many investors fall into by locking up their money in the wrong place.
Low-risk places like the cash individual savings account (or ISA) falsely gives savers the impression that their money is safe. When you factor-in the impact of inflation the result can be devastating, though, and particularly when you consider this over a long time horizon.
Sure, the volatility of share markets may cause the value of your holdings to fluctuate, but over the long-term, it has been proved time and time again that buying into such higher-risk vehicles instead of placing your capital in cash accounts provides much larger returns.
The numbers don’t lie
Investors seem to be cottoning onto this fact too, and this is reflected in recent HM Revenue and Customs data which showed a sharp popularity drop for the cash ISA.
The number of these accounts opened during the 2017/18 tax year fell by 697,000 to just 7.78m, the taxman said. As a consequence, the total number of ISAs opened during 2017/18 fell to 10.82m from 11.07m the year before.
In fact, the number of newly-opened cash ISAs has dropped steadily over the past five years, and last year’s figure falls some way short of the 11.7m accounts that were opened during the 2012/13 tax period.
This corresponds with the Bank of England keeping interest rates locked around record lows, dealing a blow to the returns that Britons can make on their savings. And while the Old Lady of Threadneedle Street has hiked rates over the past year or so, the country’s banks and building societies have shown little appetite to raise the rates offered on their cash products.
Indeed, a quick look on price comparison website Gocompare shows that the best interest rate you can enjoy on an instant access cash ISA is a paltry 1.4%, offered by Coventry Building Society.
Investors are becoming wiser
What the taxman’s figures did show was that the number of people taking an interest in stocks and shares ISAs has spiked, the number of people subscribing to such a product last year swelling by 246,000 year-on-year to 2.84m.
While the total number of ISAs fell last year, as I said earlier, the subscriptions spike for stock market-related products helped drive the aggregated value of all ISA funds to £69bn, up £7.8bn from 2016/17 levels. Stocks and shares ISAs now account for 55% of the market value of ISA accounts versus 44% for cash products.
HM Revenues and Customs’ report has led many to suggest that the cash ISA could go the way of the dodo. This is folly, of course. Cash-related products will always have their place and they are a useful tool for people to draw on emergency funds, to cite just one example of their handiness. But used too frequently and they can seriously damage your wealth. I’m delighted to see that more and more Britons are adopting a more sensible approach and investing in stocks and shares.
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