As the financial year draws to a close, many savers will be eagerly anticipating the new ISA allowance for 2021/22 which is currently staying at £20,000. However, if you are one of hundreds of UK savers who have been depositing into an ISA for the last few years, you may want to pause and reconsider whether a cash ISA is the best way to make your savings work hard towards your future.
Historically low interest rates, and increasing inflation, has meant that the cost of living is now unweighing any interest earnt on savings. This has been clearly illustrated by research conducted by AJ Bell which showed that savers who have utilised the maximum ISA allowance since 2011 would have deposited a total of £127,320. With the interest earned across this time frame, this amount would now be equal to £133,037. Whilst this might resemble a reasonable earning, once inflation is taken into consideration, this amount is actually only worth £124,857, which is of course less than the amount deposited.
This means that whilst a Cash ISA might be saving you tax, with the average interest rate across Cash ISAs now standing at just 0.4%, savers are actually seeing the value of their cash decrease. Of course these figures are averages, and the rate paid varies between providers.
So what is the solution for savers? There are a couple of things to consider here. Firstly, it is worth remembering that the first £1,000 of interest earnt for basic rate taxpayers is free of tax if you utilise your personal savings allowance. But for anyone over the personal savings allowance, it may be time to consider a slightly riskier approach.
If you are still on the fence about whether investing your cash is right for you, then you may be convinced when you learn that the same sum of cash mentioned above, £127,320, placed into a stocks and shares ISA, would now be worth 57% more, totalling £196,079, after inflation.
Of course, investing is not without risk, and you could end up losing more than you put in, plus you also have to consider whether you will need access to your cash within the next five years, in which case investing probably isn’t right for you. However, the historical performance presents a compelling argument should the circumstances be right.