Are Your ISA Savings Working Hard for You?

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“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

It’s a valid point, but the words of American author and investment adviser Robert G. Allen have been far from savers’ minds as the pandemic continues to affect our lives.

Money has been pouring into retail savings accounts since lockdown has reduced the ability of consumers to spend. UK households deposited £17.6 billion in November, continuing an unbroken upward trend in 2020. A record £1,958 billion is now held in savings accounts.1

And this is despite the rates of return on savings continuing to fall. The average easy access interest rate hit another new low of 0.18% at the beginning of last month.2

Bank of England figures also confirm that a good chunk of those savings have been deposited into Cash ISAs.3 Whilst the reasons might be different, it’s not a new trend.

In the 2018/19 tax year, the latest for which figures are available, over three quarters of all ISA contributions went into cash. That was up from 70% in the previous year. The number subscribing to Stocks & Shares ISAs actually fell.4 It’s no coincidence that 2018 was the worst year for the stock market since the financial crisis, as fears over US–China relations and Brexit unnerved investors.

But it’s not just in bad years for stock markets that ISA savers prefer cash. “Since ISAs were introduced over 20 years ago, four out of five savers have opted for a Cash ISA as the home for their annual allowance,” observes Joe Kavanagh, Investment Communications Consultant at St. James’s Place. “That amounts to over £268 billion. Tellingly though, Cash ISAs account for less than half the total value of ISA funds.”5

It’s clear that, despite years when the stock market doesn’t perform as well, history has shown opting for a Stocks & Shares ISA has paid off over the longer term because it provides the opportunity to generate tax-efficient income and capital gains.

The reality is that many people fail to make the most of the tax benefits on offer for their ISA savings. With time to think about our finances being one of the few benefits of lockdown, now could be an opportunity to review those plans.

Have you held money in a Cash ISA for more than five years?

If the answer is yes, then cash has become part of your longer-term investment strategy, and that could potentially be a problem. “Holding your wealth in cash is the right thing to do if it’s money you might need in the short term,” adds Kavanagh. “But over the longer term, if your Cash ISA savings aren’t keeping up with inflation, then your future spending power is reducing. And that could be putting your future financial security at risk.”

Do you know what rate of return you’re getting on your Cash ISA savings?

Of course, the dilemma facing cash savers is not new, and is unlikely to improve significantly for some time to come. Interest rates are at their lowest-ever level. The average no-notice Cash ISA rate is now just 0.25%, less than a third of what it was 12 months ago. There are nearly 340 Cash ISA accounts on the market currently; just three are paying a rate of return that beats inflation.6

How does the Personal Savings Allowance affect your cash strategy?

Your Personal Savings Allowance should play an important role in determining where you hold the cash you might need for emergencies. It enables basic rate and higher rate taxpayers to earn annual tax-free interest of £1,000 and £500 respectively from money held in standard bank accounts.

At current average rates, that means a basic rate taxpayer will pay no interest on savings of up to £555,000. It’s a huge sum, so does it really make sense to use your ISA allowances for an emergency cash fund?

Of course, the difference with a Cash ISA is that all interest will remain tax-free. In contrast, a rise in interest rates would reduce the amount in standard accounts on which tax-free interest could be earned. But there is little chance of interest rates rising soon – indeed, the next move could well be down. It’s one more reason to think again about whether you are making the most of your ISA allowances by using them as a home for your cash.

Is it time to check your Stocks & Shares ISA portfolio?

Yet it’s not just cash savings that need to be regularly reviewed. The best chance of maximising the tax perks of ISAs is to invest in assets with the potential of generating long-term income and capital growth.

That means a Stocks & Shares ISA. But it’s equally important to check whether your Stocks & Shares ISA investments are performing well enough to help you meet your objectives. Maybe you need to review whether it’s appropriate to take more, or less, risk with the money you’ve got invested. Or maybe you could consolidate your ISA investments to make it easier to keep track.

These are all actions that an adviser can help you understand to help you make the most of your valuable ISA allowances in this and previous tax years.

COVID-19 has provided a painful reminder that none of us know what is around the corner. Recent research suggests that over 150,000 55–64-year-olds have been pushed into early retirement by the pandemic, increasing the probability that savings are being accessed sooner than was intended. The same research revealed that 82% of those still working had not checked the value of their pensions in the past year.7

With the added incentives of the end of the tax year looming, and the uncertainty of what next month’s Budget might bring, there are plenty of reasons to review your savings plans to ensure they are giving you the best chance of achieving future financial security.


The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

2,6Moneyfacts UK Savings Trends Treasury Report, January 2021

1,3Bank of England, Money and Credit – November 2020

4,5HMRC, Individual Savings Account (ISA) statistics, June 2020

7LV= Wealth and Wellbeing Monitor, survey of 4,000 adults, December 2020

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