As a new tax year begins, we look at why people aren’t getting enough from their ISA allowance. Are financial advisers being sought out enough for their advice and understanding of personal financial pressures?
With Consumer Price Index (CPI) rate of inflation at 6.2% in February, and the best ISA instant access cash interest rate at 0.95% according to Money Saving Expert¹, can people afford to lose 5.25% per cent. Do they even realise this is the case?
In a recent survey conducted by Simplify, 65% of all respondents confirmed that they held an ISA. Of those that do hold an ISA, 59% held a cash ISA rather than stocks and shares. This is in line with government statistics where the share of accounts subscribed to in cash was 75% for 2019/2021².
People opt for cash to ensure they can access their savings easily and want their savings to be safe rather than exposed to the potential risks associated with investing in stocks and shares. They may have limited understanding and knowledge of stocks and shares, and the confidence in investing in them. Indeed, they may not even know it is an option for them. Similarly, although some people might be holding cash for the right reason because they have short terms plans, many others may be limiting themselves because they may only have a short-term outlook. It is these people that may be losing out because their cash is losing value over the longer term.
In addition, 84% of respondents have savings outside of an ISA, and 72% have those savings in a bank or cash savings account – the interest on which you’ll still be paying tax, but only 13% utilise the full ISA allowance. Those that don’t utilise their full allowance would be much better putting it in an ISA, even if in cash, but we need to understand why they don’t.
Financial Advisers are great advocates for investing in stocks and shares, though we know there is an advice gap, not everyone can afford or wants to pay for professional advice. This is where I think the Banks can help. Everyone has a bank account and it’s the natural place a vast proportion of savers will turn to for starting savings accounts. The FCA have a new initiative to reduce the number of people holding more that £10k in cash by 2025 by switching them to investments. The banks have a role to play to help educate and promote the investment benefits.
With the cost of living rising and the pandemic, it’s fair to assume that for some there just isn’t the disposable income available to be thinking about saving. The pandemic negatively impacted millions of people but there were some 6 million people who found themselves ‘accidental savers’ through this period, according to a report issued by LCP³. Due to the permanent changes to working models, this trend is likely to continue for a smaller set of workers. There are reportedly 8.6m Britons with more than £10k in cash. Perhaps the benefits of stocks and shares just aren’t understood. Whilst they do carry some risk, stocks and shares can be aligned to a person’s risk appetite, and whilst the stock market is volatile, keeping your money invested through the low points, allowing time for any dips to recover, can earn returns greater than any current interest rates on offer.
Most savers, or wannabe savers, do not have the ability to put away £20,000 each year. In our survey, just 13% used the full allowance. And almost three fifths (57%) used between £1,000 and £5,000. Rather than getting hung up on how much one can put away every year, wouldn’t time be better spent on encouraging the use of Stocks & Shares ISAs as a complement, at the very least, to the cash ISA?
It’s clear from the statistics that there is still a place for the ISA but more needs to be done to educate the public and the Wealth and Financial community have a key role to play in this.
1 Top cash ISAs: up to 0.95% easy access, up to 1.95% fixed – MSE (moneysavingexpert.com)
3 On point paper: Britain’s ‘accidental savers’ – who are they and what are they doing with their windfall? | Lane Clark & Peacock LLP (lcp.uk.com)