Why We Think the Cash ISA Is Dead - Evolution Financial Planning

It’s been seven years since the Bank of England cut interest rates to historically low levels in March 2009. While this was a welcome break for women with variable rate mortgages, it wasn’t such good news for savers.

In fact, the last decade has been a tale of woe. Seven years of quantitative easing (QE) and record interest rates have cost savers an estimated £160 billion, according to financial firm Hargreaves Lansdown.

Fast forward to 2016, and it seems savers have had enough. According to the British Banking Association, in the six months to February this year, more than £1.7 billion was pulled out of Cash ISAs – a stark contrast to the £4.4 billion that was poured into ISAs during the same period the previous year.

What’s causing the downturn in cash ISAs?

A number of factors underpin this recent ‘mass exit’ from Cash ISAs. Firstly, interest rates have plummeted in recent months, making them a less attractive option.

Secondly, the introduction of the Personal Savings Allowance, which came into force during April 2016. Previously, savings had been taxed at the same rate as income. Now, basic rate tax payers can earn up to £1,000 of interest on cash savings per year tax free. That means you could save up to £50,000 at 2% interest rate and pay no tax. Higher rate taxpayers will receive £500 untaxed.

ISAs don’t count towards this figure. So put simply, using your Personal Savings Allowance is a more attractive option than choosing a Cash ISA right now.

What should savers do instead?

If you have a nest egg to look after, securely storing money that away – either through investment or a savings programme – is still a better idea than holding physical cash. Storing cash not only makes you more vulnerable to theft; that money isn’t doing any work for you to generate a larger savings pot.

With demand for Cash ISAs in decline, many women are now looking towards options that will out pace inflation; financial products that will yield a greater return on their money.

Some current accounts offer better interest rates than savings, but you’re more likely to dip into that than savings accounts, which can make it an unsuitable option. Additionally, some providers will cap the amount of money you can hold and earn interest on in those accounts.

Standard saving accounts are seeing a surge in demand thanks to the introduction of the Personal Savings Allowance as they provide instant access.

Stocks and Shares ISAs are a tax-efficient investment account that lets you put your money into different types of investments, like managed funds. Stocks & Shares ISAs, are a tax-efficient way to save or invest your money because you don’t pay Income Tax on your interest or Capital Gains Tax on any profits.

You can save a regular monthly amount, or invest a lump sum. There is a limit to how much you can invest in an ISA each year. In the 2016/17 tax year the maximum you can invest in an ISA is £15,240.

There are new financial options emerging, too, such as peer-to-peer lending. This pairs up savers that are willing to lend money with entrepreneurs and small businesses. Rates can be quite lucrative, but this is for a reason; if the borrower goes bust, it is very difficult to get your money back.

Which alternative to Cash ISAs is best for me?

If you’re unsure how to save your cash, or would like help with lower risk investments, contact our financial planning team today.

 

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