ISAs have been an unquestionable success in helping foster the UK’s savings habit. At the end of the last tax year, around £518 billion was held in ISAs¹, a testament to the popularity of the scheme.
Yet many savers are still at risk of wasting the potential benefits of their ISA allowance, because they continue to save into low-paying cash accounts that fail to make the most of the long-term tax breaks on offer. Overall, 52% of ISA funds are held in cash¹.
Worryingly for those savers, latest figures from Moneyfacts reveal that average savings rates are the lowest ever recorded, and that many of the recent cuts have exceeded the base rate reduction last August. The average instant access Cash ISA rate is now just 0.73%². For the average long-term fixed ISA rate the fall has been even greater; uncertainty about future interest rates has seen the rate halve in the last year².
Faced with the ‘lower for longer’ outlook, there appears to be little light at the end of the tunnel for cash savers. The introduction of the Personal Savings Allowance in April 2016 has also exerted downward pressure on Cash ISA rates. The new allowance applies to standard current and savings accounts and enables basic rate taxpayers to earn tax-free interest of up to £1,000. For higher rate taxpayers the tax-free limit is £500, whilst those with total income of over £150,000 a year do not get an allowance.
Consequently, the appetite for Cash ISAs among providers has dropped dramatically, and the fall in rates has been sharper for Cash ISAs. The average instant access rate is currently 0.40%². At that level, a basic rate taxpayer could deposit £250,000 in a regular savings account and receive all their interest tax-free through their Personal Savings Allowance. For higher rate taxpayers the figure is £125,000. Of course, for those who do manage to secure a more attractive rate, these amounts would be reduced.
Individuals with accumulated Cash ISA savings may consequently be more encouraged to transfer funds into a Stocks & Shares ISA.
The reality is that the tax benefits of an ISA can only be maximised by investing for the long term in assets that offer the scope for attractive levels of income and capital growth. At St. James's Place we manage £14.2 billion of ISA investments on behalf of our clients.
There is still time for those looking to take advantage of the tax-saving and investment opportunities presented by the end of the tax year. Making the best use of your ISA allowance, before it’s too late, could be a good start.
The value of an ISA with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than was invested. 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 not be maintained in the future and is subject to changes in legislation.
¹ HMRC, September 2016 ² Moneyfacts, November 2016