Cash ISA investing falls as savers move to boost returns

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The latest official statistics on ISA saving in the UK paint a fascinating picture of a nation shifting away from cash ISA products offering feeble returns.

Saving in cash ISAs fell off a cliff, with the number of accounts opened down from 10.1m in 2015/16 to 8.5m in 2016/17. The amount of money paid into ISAs – referred to in the jargon as ‘subscriptions’ – dropped by a whopping £19.5bn during the same period, from £58.7bn to £39.2bn.

So why exactly has this huge shift occurred? There are a couple of obvious factors.

Firstly, the interest rate set by the Bank of England continues to trundle along at 0.25%, dragging down the returns on offer through cash products.

Secondly, the introduction of the personal savings allowance in 2016/17 will, for many people, have tipped the tax balance in favour of non-ISA accounts.

To recap, the savings allowance allows basic-rate taxpayers to receive £1,000 of cash interest tax-free every year (reducing to £500 for higher rate taxpayers and £0 for additional rate taxpayers).

The market-leading* one-year cash ISA rate is currently offered by Virgin Money and stands at 1.3%. Compare this rate to the best one-year fixed rate of 1.95% paid by Atom Bank. If you’re looking for a better known brand, Yorkshire Bank pays 1.5% on its one-year fixed rate account.

Savers would be better off using up their interest allowance first before stashing any spare money in a cash ISA.

Indeed, even for money over and above the savings allowance – taxable in a savings account but not in an ISA – the cash ISA can still lose out. If we take the rate offered by Atom Bank, while the gross rate of 1.95% drops to 1.56% for a basic rate taxpayer after tax, it still comfortably beats the best one-year Virgin Money cash ISA rate of 1.3%.

While demand for cash ISAs has unsurprisingly fallen, 2,589,000 people paid £22.3bn into stocks and shares ISAs during 2016/17, a marginal increase on 2015/16. With Consumer Prices Index inflation standing at 2.6%, it’s no surprise investors are turning to the stock market – either by investing directly in companies or through a fund manager – in a bid to prevent rising prices eroding the real value of their money.

Clearly we can’t be certain on what will happen in the future, but with interest rates unlikely to shoot up quickly and the savings allowance remaining in place it’s hard to see demand for cash ISAs picking up any time soon.

* All ISA and savings accounts rates quoted from MoneySavingExpert, correct on 31/08/17