Cash ISAs - point of no return?

ISA savers should think long term to make the most of the tax breaks on offer

In the first five months of the year, savers deposited ￡6.3 billion into Cash ISAs, nearly twice the amount paid in during the same period last year.1 It’s a clear indication of savers’ nervousness about what Brexit might mean for their finances, and of possible disappointment with short-term investment returns in 2018.

Financial markets are worried about Brexit too, and are almost fully pricing in a cut to interest rates by the middle of next year.2 In June, Moneyfacts reported that savings account providers had cut long-term fixed rates by the biggest amount since November 2016 in anticipation of the move.3

But that’s not all savers have to contend with. Recent Bank of England data revealed that the public’s expectation for inflation in five years’ time has jumped to its highest level in a decade, reaching 3.8% in May.4 At that rate, the spending power of money would be halved in 19 years. It’s a stark reminder of the erosive effect of inflation, even at relatively low levels. It also highlights the risks of holding funds in cash for your long-term plans, including for retirement.

The chart shows that, for most of the last decade, the average Cash ISA saver has been losing money in real terms each year. Given expectations for inflation and interest rates, it’s a situation that appears unlikely to change anytime soon.

A survey earlier this year found that two out of three savers chose Cash ISAs because they knew they wouldn’t pay tax on their interest. Yet one in four of those surveyed were still unaware of the Personal Savings Allowance.5 Introduced three years ago, it enables basic-rate taxpayers to earn annual interest of ￡1,000 from standard cash savings accounts before paying tax. For higher-rate taxpayers, the allowance is ￡500 a year.

It’s a valuable allowance for cash savers, although it’s important to remember that the advantage of a Cash ISA is that you won’t pay Income Tax on any interest earned.

ISAs can be a core part of your financial plan to build tax-efficient funds for the future. But to make the most of the opportunities your allowance provides each year, it’s important to think beyond the short term.

1,4 Bank of England, July 2019

2 Bloomberg, July 2019

3 Moneyfacts, June 2019

5 Leeds Building Society, January 2019

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

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.