CASH ISAs – Do they offer long term value for money?
Cash ISAs were launched on the 6th of April 1999 to offer individuals the opportunity to accumulate money in a tax-free environment with no investment risk. Many millions of investors have taken advantage by investing on a regular basis or by moving funds from bank deposits to ringfence money from the clutches of Her Majesty’s Revenue and Customs.
Due to their tax-free status annual contributions are capped, currently at £20,000 per person, an increase from £3,000 at launch. As a result, many individuals have accumulated significant sums over the years, many without making withdrawals in that time.
The question for many is, when was the last time you checked the rate of interest your ISA is paying? It may surprise you to know the vast majority of Cash ISAs are paying rates below 0.50% p.a., with only a handful offering 1% p.a. or more if you are prepared to lock-in with a longer-term fixed rate deal. I would encourage you to check the rate on your account as many are paying between 0-0.25% p.a.
Although Cash ISA’s offer little to no investment risk they are exposed to inflation risk. What does this mean to you today? The Office of National Statistics show that in April 2021 the year-on-year increase in consumer prices (CPI – a measure of inflation) was 1.5%. Whilst for many other reasons this is good news for us all, those with returns on their Cash ISAs below the rate of inflation are seeing their savings devalue year on year.
What are the alternatives you might ask? Whilst it is always important to maintain a sum of money in the bank ‘for a rainy day’, longer term there are opportunities to take advantage of returns available from Investment ISAs, more commonly known as Stocks and Shares ISAs.
Legislation will allow you to transfer some or all your Cash ISAs to an Investment ISA without impacting on your annual ISA allowance. In other words, you can still invest up to £20,000 over the course of the tax year and in addition transfer sums in from your Cash ISA. You are also able to invest in a mixture of Cash and Investment ISAs within your £20,000 allowance
It is important to understand that Investment ISAs can carry additional risk, and this is where we can help. By fully analysing your situation and your appetite for investment risk we can make a recommendation to suit you, whether that is a very cautious investment carrying low risk or something a little more adventurous to suit your longer-term needs.
Historically Stocks and Shares ISAs have outperformed their Cash ISA counterparts in the medium to long term, and whilst you may not want to transfer all your funds in one go your adviser can help guide you down the most suitable path.
As with other investment types, it is important to be aware that the value of your investment can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance
If you wish to discuss this opportunity further, please contact your adviser directly or email firstname.lastname@example.org Nigel Benn
Partner - Alexander Beard Wealth LLP (Yorkshire Branch)