Nervous investors shun stocks and shares in favour of cash ISAs as rates hit decade long low

Figures from HM Revenue and Customs (HMRC) for the 2018-9 tax year show the number of new cash ISAs jumped, but fewer people invested in stocks and shares products.

Overall the number of new ISA accounts rose; 11.2 million adult ISA accounts were opened in the 2018-19 tax year, an increase of 10.9% on the 10.1 million in 2017-18.

Cash ISAs saw the biggest increase, with the number of subscriptions going up by 1.4 million from 2017-18; the amount saved rose £730 million, to £44 billion.

By contrast, stocks and shares ISAs became less popular, with the number of accounts opened dropping to 450,000 compared to the previous tax year; inflows were down by £5.2 billion to £22.6 billion.

The rise in the number of cash ISAs comes despite the Bank of England setting historically low interest rates; Sarah Coles, personal finance analyst at Hargreaves Lansdown told Moneywise that falling stockmarkets have put a lot of people off investment ISAs.

She says: ‘They [stocks and shares ISAs] ended the financial year higher than they started it, but there was something of a bumpy ride in between. At the same time there was an enormous amount of uncertainty around Brexit, and a deadline looming in March 2019. The fact an agreement looked unlikely by the deadline worried plenty of investors.’

Brexit uncertainty combined with a tough Q4 for markets in 2018 may well have soured investor appetite for stocks and shares ISAs but cash rates have languished for over a decade since the financial crisis. Cash is imperative for short term funding or, as many have discovered during the pandemic, a rainy-day pot, but better returns are available for those who can afford to lock a portion of their cash away for at least five years.

A low interest rate environment should spur savers into switching, as variable interest rates have plummeted in the aftermath of the two base rate cuts; however the stock market appears to be too risky for those with short term savings goals.
 

Junior ISA – JISA

 
Junior ISAs grew in popularity, with the number of accounts increasing from 907,000 to 954,000 in 2018-9; a total of £974 million was subscribed, around 57% of which was in cash.

JISAs are held in the child’s name and provide a tax-free way to save for your child until they are 18 and work in a similar way to an adult ISA.

In an announcement that captured few headlines, the annual subscription limit for JISAs was dramatically increased to £9,000 for the tax year 2020-21 which appears a questionable decision, given the historically modest level of contributions; the additional tax break is likely only to be used by a small minority of wealthy people.
 

Lifetime ISA – LISA

Lifetime ISAs showed strong growth with the number of accounts taken out rising 45% from 154,000 to 223,000 in the period; total inflows of £604 million.

While the number of people opening a Lisa surged by 45%, people were putting less money into accounts, with the average subscription dropping by 16% to £2,709; this figure may have been distorted by the fact that in the first year of the LISA you could transfer your entire Help to Buy (HTB) ISA balance without it counting towards your annual £4,000 LISA subscription, while in 2018/19 this was not possible.

Introduced in April 2017, LISAs can be opened by anyone aged 18-40, either by those saving a deposit for a first property or saving for retirement. LISA savers can put away up to £4,000 a year until they are 50, to which the government adds a 25% bonus.
 

Cash ISA/Savings accounts

Moneyfacts reports that average savings rates for ISAs, easy access and fixed bonds have fallen to their lowest levels since records began in 2008 due to dwindling interest rates and coronavirus; the average easy access ISA rate in June was just 0.45%, down from 0.85% in January.

One-year and longer-term ISA returns dropped below 1% per cent for the first time since December 2016, with the number of ISA products available falling by 74.

Moneyfacts said the drop in rates demonstrated that the savings market had ‘continued to deteriorate’ after ongoing uncertainties surrounding the coronavirus as well as cuts to the base rate from 0.75% to 0.25% on March 11th, and 0.1% per cent on March 19th.

It warned of further cuts to easy access accounts if providers see an increase in cash deposits in the coming months; easy access accounts are popular with savers for their convenience rather than for the interest they can earn and the pandemic has emphasised the importance of an emergency fund that can be accessed quickly for peace of mind.

In 2019 the Office for National Statistics measured the average share of household disposable income saved to stand at around 6%, which has been predicted to rise to over 20% amid lockdown by the Centre for Economics and Business Research.