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75% of savers favour cash ISAs despite poor returns

Joanna Faith
Written By:
Joanna Faith

Britons’ love affair with cash ISAs continues despite interest rates remaining at record lows.

According to the latest statistics from HM Revenue and Customs (HMRC), 75% of people who opened an ISA in the 2019-20 tax year opted for a cash ISA over a stocks and shares product – a figure HMRC said was “broadly consistent” with the previous year.

Around £75bn was subscribed to ISAs in 2019-20, an increase of £7.1bn, with cash ISAs accounting for nearly £50bn of the total.

Total funds held in ISAs hit a record £620bn in April 2020, driven by a 16% increase in funds held in cash.

Is holding cash a problem?

No, there is nothing wrong with holding money in cash, particularly if you have a relatively short time horizon.

But interest rates on cash accounts are incredibly low and savers risk having the real value of their fund eaten away by inflation over time. The best easy access cash ISA pays just 0.46% while the consumer prices index measurement of inflation sharply increased to 1.5% in April, more than double the 0.7% recorded in March.

Tom Selby, senior analyst at investment firm, AJ Bell, said: “Those who held a significant proportion of their ISA in cash might have felt like they had dodged a bullet in March and April last year, when markets tanked as the UK entered its first lockdown.

“However, values have since recovered substantially, with the FTSE All share delivering whopping returns of 37% since April 2020 – a boon those invested in cash will have missed out on.”

Selby added: “Those willing to lock their money away for 5 years could get a Cash ISA return of 1.21% – a significant improvement but hardly exceptional given many expect inflation to return to the economy over the next 12 months. By contrast, the FTSE 100 is forecast to yield 3.8% this year.

“It is this inflation which poses one of the biggest risks to cash investors in the coming years. Anyone with a longer-term time horizon who is concerned about the impact of rising prices on their funds and happy to take some investment risk should consider putting at least some of their portfolio in stocks and shares.”

Junior ISAs

Junior ISA subscriptions jumped above the one million milestone for the first time since the accounts were launched in 2011.

In total, £971m was subscribed to junior ISA accounts in 2019-20, around 61% of which was in cash.

The junior ISA annual subscription limit rose from £4,368 to £9,000 in the 2020/21 tax year.

Lifetime ISAs

Lifetime ISAs (LISAs) also saw a substantial jump in popularity in 2019-20, with the number subscribing to the product more than doubling to 545,000 during the tax year.

All money invested up to £4,000 during the year will have benefitted from an upfront boost of 25%, up to a maximum of £1,000.