Making the most of your ISA allowance: Cash ISAs, Inflation and the Personal Savings Allowance
March 2022Interest rates from cash savings have been minimal to non-existent in recent years and despite seeing small increases of late, it’s not hard to see the lack of value in cash savings over the long term.
Interest rates from cash savings have been minimal to non-existent in recent years and despite seeing small increases of late, with inflation hitting 5.5% in January* it’s not hard to see the lack of value in cash savings over the long term.
It’s all well and good getting an extra 0.25% here and there on your cash ISA, but until the interest rate exceeds inflation you are still losing money, at least in real terms. £10,000 invested in a Cash ISA 10 years ago would be worth £9,385 in today’s money after taking inflation into account**.
Historically Cash ISAs were used by investors to protect their savings from income tax, as interest paid on a traditional savings account was paid net of tax, whereas there was no income tax to pay with Cash ISAs. With the introduction of the Personal Savings Allowance in 2016 and the changes this brought, suddenly Cash ISAs lost a lot of their appeal. Savings interest would now be paid gross, and most savers wouldn’t pay tax on the interest earned.
So, if a Cash ISA no longer has as much use as a tax shelter, are you then wasting your annual ISA allowance by not investing? There is never going to be one right answer to this but consider if you had invested that same £10,000 for the same length of time, but in the average global stock market fund within a Stocks and Shares ISA, this would now be worth £26,402 after inflation is accounted for**.
Investing is always going to carry a degree of risk, but this can be managed by diversifying your assets and matching the level of risk taken to your own personal risk tolerance. The current annual ISA allowance is £20,000 and if unused by the end of the tax year, it is lost.
The deadline is fast approaching so if you feel that you or any of your clients would benefit from further discussions on this, please contact us below.
Important note: Investments can fall as well as rise, and past performance may not be a reliable guide to the future.
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