With interest rates so low, it’s no surprise to read that the amount of cash being put into ISAs has fallen dramatically in the last year. In 2015-2016, £58.7bn was paid into cash ISA accounts. In the most recent financial year, that fell by almost a third to £39.2bn.
So what’s the reasoning behind the drop in cash ISA investments? James de Sausmarez, director and head of investment trusts at Janus Henderson Investors, argues that because Brits are ‘a conservative bunch’, we tend to fall back onto cash savings as being the ‘safest’ way of to look after our money. But here’s where we are going wrong; cash savings often aren’t the best option. Perhaps, thanks to a combination of low interest rates and the introduction of the personal savings allowance which allows people to earn up to £1,000 in savings income before tax, we have finally come to terms with that fact.
The problem is, cash ISAs are so simply to deal with. Simply start one up, pop your money in, and off you go. You don’t have to pay income or capital gains tax on it, and there’s no need to worry about it; you can simply sit back, relax and watch the money come rolling (or perhaps trickling) in.
In recent years, it has most certainly been a trickle, however. The average cash ISA at the moment pays just 0.34%; the current rate of inflation, on the other hand, is at 2.6%. So what other options are out there? Well, you could try to switch your cash ISA to a stocks and shares one; it’s certainly a riskier option, but one that does have the potential to offer far greater returns. There are other options, too; you could take a look at investment trusts, for example.
On the other hand, just because cash ISAs aren’t doing well at the moment doesn’t mean that they won’t recover. While de Sausmarez at Janus Henderson partially blames the fund management industry for failing to explain to the public which products are more suited to their investment needs, or how they work, Danny Cox, a chartered financial planner at Hargreaves Lansdown, doesn’t think we should necessarily be turning our backs on cash ISAs for good just yet. Abandoning cash ISAs, he says, ‘may prove to be short-sighted as neither low interest rates nor the personal saving allowance are necessarily a permanent fixture of the financial landscape… they are the saver and investor’s friend and should be at the heart of every portfolio.’
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