Cash ISAs - are they still worth it?
There’s around £300 million sitting in cash ISAs, but with saving rates so low, many are questioning if cash ISAs are still worthwhile.
Savings have grown over lockdown
Recent figures from the Bank of England show that for some UK households, Covid-19 lockdowns have been an opportunity to build up an excess of around 100bn in savings.
The growth of savings was greatest for high-income households. Forty-two percent of high-income employed households saved more during the pandemic, compared with 22% of low-income employed households. Those in retirement also saved more: 36% of them had increased their savings.
The Bank of England’s chief economist is hoping some of these reserves will go towards a post-lockdown spending spree that will help Britain bounce back.
It’s safe to assume that much of this will be kept sitting in bank accounts or cash ISAs. Understandably, many will want to hold onto some level of cash savings in case of emergencies or to hold aside for future investment opportunities. However, with interest rates not even keeping up with inflation, they could see the value of their savings erode if left in cash savings for the long term
According to recent data from HMRC, cash still holds a certain appeal for savers. Three times the number of people opened cash ISAs over stocks and shares ISAS – so what remains the appeal of cash, and what’s the downside?
Reasons to keep hold of your Cash ISA
Cash can be great for short term goals
For short-term financial goals such as holidays house deposits and education, it’s reassuring to know your money is safe – and cash ISAs or savings accounts provide that level of reassurance.
Investing always carries an element of risk, so to be able to ride out the lows, it’s important to be able to lock your money away for a few years at least.
Cash Savings are always better than borrowing
If unexpected expenses arise, it’s always good to have cash reserves to rely on. If all your funds are tied up in long-term investments, then you may feel the need to take on loans or credit cards. The associated interest rate on borrowing will likely out-way any investment returns you make.
Peace of mind
Unemployment is soaring as a result of the pandemic, knowing you have 3 – 6 months’ worth of bills if the worst were to happen can be a great comfort.
Investment Strategy
Cash is about as steady as it gets, although in real terms it loses value. It’s sensible to have some reserves to take advantage of future investment opportunities that need to be acted on quickly.
Reasons to Ditch your Cash ISA
Low-interest rates
Interest rates are low, factor in inflation and the rising cost of goods and services – it’s safe to say your £50,000 in cash today, will be worth a lot less in real terms 10 years from now.
Limited tax benefits
The main draw of ISAs is the associated tax benefits, but how beneficial is it, when you are dealing with cash?
Based on interest rates being low, inflation may mean cash ISA’s lose value in real terms. As an alternative, the stocks and shares ISA offers a tax-efficient way to invest. You pay no tax on dividends and interest earned, and no capital gains tax. Stocks and shares ISAs, over the longer term, could deliver a higher return than cash ISAs and your money has a better chance of keeping up with inflation and benefitting from tax benefits. But remember – with all investing, there is a risk that the value of your investments could fall.
Personal Savings allowance
Thanks to the introduction of the Personal Savings Allowance, ISAs aren’t the only way to earn interest tax-free on cash savings.
Easy access can be too tempting for some.
Having an emergency pot is advisable, but all too often people keep an excess in cash, only to dip into it regularly. Before long those savings start to dwindle and the hope of building up a lump sum with it. If you can afford to lock the money away, then investing your money could help you prevent unnecessary withdrawals.
Invest up to £20,000 each year, with tax-free* returns
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*Tax rules can change and are dependent on your circumstances. When investing, your capital is at risk. Learn more about risk here
Signia Sovereign Portfolio – an alternative to cash
For many, cash deposits are a lost opportunity to grow their savings.
Many investors remain in cash because they are worried about the current market conditions. As a consequence, they have seen their capital erode and have suffered important opportunity costs over time.
We’re challenging the market with Signia’s Sovereign Portfolio, targeting an annualised return in excess of 2% above cash*.
- AA- Credit Rating – The portfolio will always carry an average credit rating of between AA- to AAA. That rating is higher than the majority of UK high-street banks.
- Inflation Protection – Persistently low cash rates on deposit accounts mean an investor’s capital is likely to be eroded by inflation, whereas the Signia Cash Alternative targets a return of 2% above cash.
- Diversified Risk – Risk is diversified across a number of different governments, countries and underlying securities as opposed to the concentrated counter-party risk of an individual bank.
- Ring-fenced Portfolio Securities – Cash deposits are vulnerable to a bank’s balance sheet risk, whereas money in Signia’s portfolio is ring-fenced.
*Overnight risk free interest rate N.B. While portfolio volatility is expected to be very low, the value of your investment may fluctuate and there can be no assurance that targeted returns will be realised.
We’re challenging the market with Signia’s Sovereign Portfolio - A diversified portfolio of high quality fixed income securities designed to provide a solution for cash*.
