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Investment in stocks and shares Isas overtakes cash Isas 

Investment in stocks and shares Isas overtakes cash Isas 

The amount of money invested in stocks and shares Isas has overtaken the amount deposited in cash Isas – at £315 billion compared to £270 billion for the 2016/17 tax year – according to new data released by HM Revenue & Customs.

There are two main drivers behind the decline: the continued record low interest rate environment and the introduction of the personal savings allowance in April 2016.

Tim Holmes, managing director at Salisbury House Wealth, says savers have finally cottoned on to the fact that cash Isas offer ‘very poor value’. He adds: ‘Having your money erode away in a cash account does little to help you save for retirement.’

The other factor at play is the fact that taxable savings accounts have for some time now been offering higher rates compared to cash Isas. This trend has been largely driven by the fact that challenger banks, who have been increasing rates, do not tend to offer cash Isas. In contrast, the older and more established banks, which on the whole do offer cash Isas, have been sitting on their hands.

Anna Bowes, director at savingschampion.co.uk, points out ‘for some savers, choosing an Isa right now will see them earn less interest even if they have fully utilised their personal savings allowance and are therefore paying tax on some of the interest.’

She adds: ‘For example, one of the best one year fixed rate bonds is currently paying 1.83 per cent gross/AER (1.46 per cent net for a basic rate taxpayer, or 1.10 per cent for a higher rate taxpayer).’

‘The best one-year fixed rate Isa, on the other hand, is paying 1.30 per cent tax free. So, in this example, someone who does pay basic rate tax on some of their savings interest and who would therefore normally look to shelter as much as possible in a cash Isa, would actually be better off with a fixed rate bond, even after allowing for the tax.’ 

Overall, the number of people subscribing to stock and shares Isas also increased to 2,589,000, up from 2,539,000 in the 2015-16 tax year. 

Why parents saving for children should be investing

A different picture, however, emerges in the Junior Isa market. While the number of accounts opened rose by 7.6 per cent in the 2016/17 tax year 71.7 per cent of money saved in them went into cash rather than the stocks and shares Isa.

According to Jason Hollands, managing director at Tilney Group, parents are doing their children a disservice – as an 18-year period is ample time to ride out the various peaks and troughs of stock markets, particularly when income-generating investments are held and the returns reinvested.

He adds: ‘While we all need some cash for a rainy day or to meet emergencies, cash is not a suitable place to park assets for the long-term as the real value will be steadily eroded by the acid of inflation and this is especially the case in the current environment of record low interest rates and inflation running above the Bank of England’s long-term target rate of 2 per cent.’

10 years of record low interest rates: how savers have lost out

When interest rates were cut to 0.5 per cent, nobody in their right mind would have predicted that nearly a decade later rates would remain at rock-bottom levels.

Below, with the help input of Hargreaves Lansdown and Chelsea Financial Services, we run through how inertia has cost savers dearly.

he extent of the decline is laid bare by research carried out by Hargreaves Lansdown, who worked out that £1,000 stashed in a typical instant access account in July 2007 would a decade later be worth £1,107.

This, however, fails to take inflation into account, which has risen by 26 per cent over the past decade. When inflation is added into the calculation the real value would today be £878.

By comparison the same £1,000 investment in the UK stock market in July 2007 would now be worth £1,666, falling to £1,323 after factoring in inflation.

Laith Khalaf, senior analyst at Hargreaves Lansdown, adds: ‘This is a pretty astonishing result, seeing as this investment would have been made just as the UK stock market was about to fall by almost 50 per cent as a result of the financial crisis.

‘These figures highlight the healing power of time on stock market returns, even if you happen to be unlucky enough to invest just as conditions take a turn for the worse. The figures also demonstrate the toll taken on cash in the bank by such an extended period of low interest rates.’

How investors have fared better

In terms of actively managed investment funds, investors who backed one of the 10 top-performing UK equity funds since March 2009, when rates were cut to 0.5 per cent, would have pocketed returns of 400 per cent plus, separate research by Chelsea Financial Services shows.

The top performer over the period is MFM Slater Growth, which would have turned a £1,000 investment into £6,529.50, up to the end of May.

UK funds across the board have fared well. Investors in the average UK all companies fund, which may invest across the entire UK main market, would have seem seen their £1,000 investment grow to £3,081.72.

Meanwhile, those who consider themselves as more risk-averse than the average investor, could have seen their money almost double through fixed interest holdings, with the average strategic bond fund turning £1,000 into £1,933.10

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