HM Revenue and Customs released some interesting data this week, drilling down and producing statistics about the Individual Savings Account (ISA).
According to the latest data, the number of people subscribing to an ISA – either a cash ISA, stocks & shares ISA and/or an Innovative Finance ISA - was higher in 2018/19 (the latest available figures) compared to the year before - up by 1.1m to 11.2m. This is the reverse of a five year downward trend and indicates that there is life in the old ISA dog yet!
The figures also showed a flight to cash – as the number of people adding to a cash ISA rose by 1.4m, while the number of investors subscribing to a stocks and shares ISA actually fell by 450,000 - its lowest level since 2007/08.
Largely because of this increase to the number of people opting for a cash ISA, the amount saved into ISAs as a whole increased by £2.3bn, to £67bn in 2018/19. The amount saved into cash ISAs increased by £7.3 billion, while the amount subscribed into stocks and shares ISAs fell by £5.2 billion compared to 2017-18.
Of course, all of this data is from over 12 months ago – so this flight to safety was most likely due to the uncertainty surrounding Brexit. Today, as well as this, the current fear is what effect the coronavirus will have on the economy.
Since April last year, according to Bank of England figures, the amount in cash ISAs has continued to rise – although it has levelled off recently. This could be because the rates of interest on cash ISAs in April 2019 were a far cry to what they are today.
Best buy 12 month fixed rate cash ISAs were paying as much as 1.77% in April 2019 – today the best 1 year fixed rate cash ISA is paying 0.75% - a drop of more than 57%!
That said, we are still seeing a lot of interest (excuse the pun!) from savers who are looking for the best cash ISA rates – especially those who have built up a large amount in this tax haven – as the interest paid to them is tax free, always.
If you had saved the maximum allowed into a cash ISA since they were introduced in 1999, you could have deposited £181,520 and even if you had only earned a rate equivalent to the base rate, this could now be worth more than £195,000. Even earning just 1%, the interest earned outside a cash ISA on this amount would be almost double a basic rate taxpayer’s personal allowance.
Of course, with cash ISA rates as poor as they are currently, even basic rate taxpayers who are fully utilising the Personal Savings Allowance may find that the net rates of the best fixed rate bonds are often higher than the tax-free cash ISA.
For example, the best 1 year fixed rate bond is paying 1.00% gross/AER. After the deduction of basic rate tax at 20%, the net rate is 0.80%.
The story is different when you take a look at easy access accounts. The best easy access account is with NS&I and pays 1.15% gross, or 0.92% net of basic rate tax. The best easy access cash ISA on the other hand is paying 1% (Al Rayan Bank) or 0.90% (NS&I) – so it’s much of a muchness.
So, what should savers do?
Of course, there is no easy answer as if you don’t use your ISA allowance each year, you lose it. So those with larger amounts of cash could find themselves paying more tax on their savings in the future if the rates on cash turn around and if the gap between cash ISAs and non ISAs narrows in the future.
But with interest rates as low as they are, it’s hard not to be tempted to simply earn as much as possible now and worry about the future at a later date.
It’ll be interesting to see what the figures show for this year, in terms of subscriptions to ISAs – as potentially the even lower cash savings rates available, especially on cash ISAs, could see an end to a flight to safety, with savers turning instead to investments.