New data from the HMRC shows that 2019/20 was the best year ever for the Individual Savings Account (ISA). But most of the money is going to waste…
Here at Steps to Investing, we bang on about the benefits of the ISA quite a bit. Set up in the late 1990s to replace Personal Equity Plans (PEPs), the ISA structure has gone through quite a bit of change over the years. Gone are the ‘mini’ and ‘maxi’ distinctions with their £3,000 and £7,000 limits, for example. And now we have 4 different types covering everything from peer-to-peer loans, property and of course the two stalwarts cash and shares.
Cash ISA is king
But one thing hasn’t changed. As a nation we still prefer the simple cash ISA over the stocks and shares equivalent. Data from the Revenue tells us that some 1.2 million more people paid into Cash ISAs in 2019/20, while the increase in subscribers to Stocks and Shares ISAs was only a quarter of this number – 300,000. And to be honest it ’twas ever thus.
I remember when we rolled out the stocks and shares ISAs back in the day at Halifax Share Dealing Limited. Our parent, Halifax plc launched its cash product too, and you can guess which of the two the money went into. The difference back then was that you could get 6% interest on the money deposited. According to Money Savings Expert, today the best rate you can get for a Cash ISA is a paltry 0.46%. With inflation running at 1.6% prices are rising way faster than the value of cash in your ISA. So why bother?
Why have a cash ISA?
Well, first off cash is easy to access. So even if it’s going down in value in real terms, you can get at it much easier than if you were to put your money into something like shares. Yes you can sell shares at a moment’s notice, but you should really be thinking about them as a long term investment of at least 5, but more preferably 10, years.
Which brings me to reason two. The inflation effect on cash is a steady, slow attrition of the value of your money. It’s not going up and down, sometimes wildly, like share prices can do every day. That brings some security for some people – you know where you are with a cash ISA.
Third, interest rates are very low now. In fact they can’t get much lower, and so arguably the only way is up. And because ISAs come with a limit (this year it’s £20,000) if we ever got to point where rates recovered to decent levels you couldn’t simply stick all your cash from under the bed in a cash ISA in one go. Admittedly this is a nice problem to have for wealthy minority. But getting the cash into an ISA every year, even when rates are low, means you’re prepped for better times.
No surprises
So it’s no surprise to read these numbers this week published by investment platform AJ Bell:
- Around 13 million Adult ISA accounts were subscribed to in 2019/20, up 16% from 11.2 million in the previous tax year, new HMRC data reveals (Commentary for Annual savings statistics: June 2021 – GOV.UK (www.gov.uk))
- The total value of the Adult ISA market hit £620 billion in 2019/20, a new record
- The number of people subscribing to Lifetime ISAs more than doubled year-on-year, from 223,000 to 545,000
- The total amount paid into ISAs increased by £7.1 billion to £75 billion, with £4.8 billion extra invested in Cash ISAs versus £1.6 billion in Stocks and Shares ISAs.
So what’s a prudent person to do? Well the advice about keeping some cash for a rainy day still applies, even when that cash is slowly going backwards. 3 to 6 months’ salary is the received wisdom. But beyond that for longer term goals, stocks and shares ISAs are almost always going to provide a better return. In effect you’re swapping the certainty of your cash slowly eroding with the possibility of it providing a much better return over time.
Just do it…
And all the while by using the ISA structure you’re protected from tax on interest and tax on the value of your money rising through capital gains. Yes, stocks and shares ISAs come with admin charges that don’t apply to cash ISAs – but in the scheme of things they are tiny and in most cases worth it. It’s not a reason to avoid getting started. In fact, the sooner you start the better as the effect of compounding means that whatever you can put by will benefit.
So whatever you do, make sure you use up your limit before you do much else. There’s very little not to recommend any kind of ISA. As they say at that sports brand, just do it.