ISA savers invest in cash accounts despite low interest rates – how to boost your returns | Personal Finance | Finance


ISA decisions appear to have been forced on savers recently as according to analysis of HMRC figures from Hargreaves Lansdown (HL), coronavirus has sparked a “last-minute” ISA dash. In examining the details, it was found that cash ISAs remain popular among savers, even in a low interest rate environment.

Sarah Coles, a personal finance analyst at HL, broke down these figures.

She said: “The coronavirus crash sparked a last-minute dash into ISAs in the 2019/20 tax year. Both cash and stocks and shares ISAs took more money than a year earlier, while the number of Lifetime ISAs more than doubled.

“Until the last few weeks of the tax year, stock markets had moved around a little but looked set to end the tax year roughly where they started. The pandemic changed all of that, sparking a massive sell-off that knocked a third off the value of the FTSE 100. Suddenly investors saw huge value in the market, and rushed to buy before the end of the tax year.

“We saw the impact of this rush at HL. In the last week of the tax year, there were 2.96 million visits to the HL website – up from 1.07 million a year earlier. In the final hour, a HL stocks and shares ISA was opened or topped up every seven seconds.

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“This was just the beginning too, as the pandemic gave people the time, money and enthusiasm for investment that saw an enormous boost in stocks and shares ISAs. Next year’s figures are going to show another big increase.

“2019/20 was a huge year for Lifetime ISAs, which more than doubled from a year earlier. Whenever a new ISA is launched we see the numbers climb as people get familiar with them, and in its second year, the LISA has boomed. Next year we expect these figures to have jumped again, as people who made lockdown savings ploughed their money into LISAs to help meet their property and retirement goals.”

Sarah went on to examine cash ISA which prove to be popular despite their limited benefits in the current market: “Despite a lacklustre cash ISA season, the number of cash ISAs was up from a year earlier too: almost £50billion was saved into cash ISAs. They’re by far the most common home for our money, and made up 75 percent of all ISAs we paid into during the year.

“Savers are realising that despite the tax-free savings allowance, there are still very good reasons to open a cash ISA. For a basic rate taxpayer with modest cash holdings, you won’t save any tax today: the key is what you could save further down the line as your savings build – especially if interest rates rise, you move tax brackets, or the savings allowance is cut.

“However, although cash continues to dominate, the rush into stocks and shares ISAs at the end of the year can be seen in the figures. For 14 of the past 15 years, cash ISAs have made up a larger proportion of new ISAs than we saw in 2019/20.”

While many experts welcomed the fact that savers are contributing to ISAs generally, some warned savers could lose out by not utilising stocks and shares accounts.

It should be remembered returns from investing in the markets are not guaranteed but over the longer term, sensible investments can generate profits well above what one could get from current interest rates.

Myron Jobson, a Personal Finance Campaigner at interactive investor, commented on this: “The figures show that cash ISAs remain a firm favourite among British savers.

“Despite the low rates on offer, four times as many people opened or contributed to a cash ISA in the 2019-20 tax year than to the stocks and shares equivalent on from the previous tax year (1.2 million versus 300,000).

“However, while the coronavirus crisis highlighted the importance of having cash savings for a rainy day, long term savers should take care to not to keep more than they need in low interest accounts because it can be eroded by inflation.

“Rock bottom savings rates also provide the impetus to invest.

“Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach.”

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