Due to changes in personal allowances, the cash ISA should be a non-starter for the majority of savers, yet a YouGov survey for IG shows that savers continue to use it. Indeed it is by far the most popular investment product in use today.
It seems many savers are unaware of the savings allowance, in which the first £1000 of savings income is tax—free for basic rate tax payers, and £500 for higher rate tax payers (45% tax payers are ineligible). With the best instant access bank accounts offering an interest rate of around 1.2% (cash ISAs are no better), this would allow for tax-free cash balances of approximately £83,300 or £41,650, for basic and higher rate tax payers.
Nevertheless, come ISA season many high street banks will offer teaser rates to get people to open accounts with them. For the banks, this represents an opportunity to acquire new customers cheaply, with a view to offering them higher margin products and services at a later date.
While holding some cash is important to cover life’s emergencies, or to save for a house deposit, long-term holders of cash are effectively providing cheap financing to banks, and foregoing the opportunity to make larger returns in the rest of the economy. All non-cash investments carry risk of loss, but over the long run, participating in the growth of the global economy through equity ownership has been shown time and time again to offer a better chance of growing your wealth over and above inflation.
The good news is that investing in a stocks and shares ISA has never been easier (or cheaper) to do. Online investment platforms have opened up share dealing and wealth management services to UK investors, with IG Smart Portfolios offering a low-cost range of risk-managed portfolios to suit most investor preferences.
While recent tax changes mean the cash ISA is less interesting than before, it is still a common misconception that cash cannot be held in a stocks and shares ISA, or be transferred into one. Your broker may not pay the best interest rate, but it is an option open to you should you choose it. As with all investments your capital is at risk.