New figures out from HMRC have recorded record amounts of money pouring into cash ISAs in the tax year 2019-20. The pandemic lockdown which restricted not only our movements but also our spending, has seen a dramatic increase in the amount of ‘accidental savings’ over the last 18 months. And HMRC’s recent statistics have illustrated that the majority of the money deposited into ISAs, has gone into cash.
In the tax year 2019-20, 13 million new ISA accounts were opened, compared to just over 11 million the year before. Of these 13 million accounts, 9.7 million were cash ISAs and savers deposited almost £49billion, up from just £44billion the year before.
In contrast only 2.7 million stocks and shares ISAs were opened during the 2019-20 tax year, although with a total deposit of £24billion, the average deposit per account was around £8,900 compared to an average of just over £5,000 into each cash ISA.
As these figures only account for the very beginning of lockdown, it’s likely that far more has been added subsequently.
While it is encouraging to see people making use of at least some of their tax-free ISA allowance, which is currently £20,000 per year, this huge increase in the amount of money flowing into cash ISAs is at a time when saving rates are at rock bottom levels. Even though the interest earned is tax free, with inflation on the increase, many savers are losing money in real terms.
While CPI inflation for May was 2.10%, at the time of writing, the best easy access cash ISA is paying 0.54% tax-free AER (Cynergy Bank). In fixed-rate ISAs, savers could earn 0.71% AER over 12 months (UBL UK) and the best fixed term cash ISA is paying 1.21% AER – fixed for five years (also UBL UK).
As a result, those who don’t need access to their money in the next few years might want to consider a stocks and share ISA instead. However, placing your money into investments rather than cash poses different risks that savers need to make sure they are fully aware of so that they understand exactly what could happen to their funds.
Alex Shields, Chartered Financial Planner at The Private Office (TPO) says “The reduction in spending as a result of lockdown has been a good opportunity for people to build up cash reserves, and in some cases this has been quite significant. Although they may have earmarked some savings for post lockdown expenditure, and to be kept as liquidity, the remainder could be considered for investment to try and get a better return than inflation, so the funds keep up with the cost of living – especially now that there are no adult cash savings accounts that pay an interest rate that matches or beats inflation.
But if you have not invested before, it is important that you are comfortable with the bumps in the road associated with investing, which can be a shock to those used to savings accounts where the capital value does not fluctuate.”
Those who can’t or do not want to invest, should at least make sure that they pick the best savings rates available to help mitigate against inflation – but far too many are not doing so. According to the latest figures from the Bank of England there was £242billion held in non interest earning savings accounts at the end of April this year. That is an increase of £52billion since lockdown began in March 2020 - earning no interest whatsoever.
If that money was earning even 0.50%, it would result in an extra £1.2billion in interest a year paid to savers.
In addition to standard cash and stocks and share ISAs, the popularity of the Lifetime ISA (LISA) is also evident. The amount of money deposited into LISAs more than doubled in 2019-20 to £1.2billion up from £604million the year before – and with 545,000 new accounts, this equates to around £2,300 per person.
The Lifetime ISA (LISA), which is available to 18 – 39 year olds and also benefits from a Government contribution of 25% added to each deposit made up to the annual Lifetime ISA allowance, which is £4,000 currently (but is part of your overall £20,000 annual ISA allowance). So if you deposit £4,000, the Government will add £1,000, immediately boosting the balance.
Alex Shields adds “This account is most often used to save for buying a first home and therefore access could be needed at short notice; this means that a cash LISA is likely to be more appropriate. However, the LISA can also be used to save for later life. If the funds are not used for a first home, they can only then be accessed penalty free after the age of 60, therefore the long-term nature of this account could mean investing the money is the better option for the potential of achieving higher long term returns”
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