Are Cash ISAs worth having?

When is it a good idea to have a Cash ISA?
Woman writing in notepad | Wealthify
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In 2018/19, about 11.2 million adult ISAs were paid into, and 76% were subscribed in cash1. Needless to say, Cash ISAs are popular, but are they the best option to save money? Here’s what you need to know about Cash ISAs.

 

Why is it a good idea to have a Cash ISA?
Whether you want to build up an emergency fund or save for the future, it’s usually a good idea to pay into a Cash ISA. With a traditional savings account, you receive interest on your savings, which is a good thing as this means your money is growing. But you may have to pay income tax on these earnings, depending on how much you get paid in interest. Typically, if you’re a basic rate taxpayer, you can earn up to £1,000 interest tax-free each year – this is your personal savings allowance, and anything above may be subject to income tax. Similarly, if you’re a higher rate taxpayer, you should be able to earn up to £500 without paying any tax on it.

With a Cash ISA however there’s no limit, anything you earn is tax-free, be it £5 or £5,000. Now Cash ISAs come with many rules that are worth knowing. To start with, the total amount you can put in a Cash ISA is limited to £20,000 per tax year (subject to change) – this is your annual ISA allowance, and if you have other ISA types opened, you can split it between the different account. One thing to note though is that you can’t pay into two Cash ISAs in the same tax year. And every year, you have until midnight on the 5th April to use your ISA allowance, otherwise you’ll lose it forever, so it’s important to see how much you’re able to put aside – it doesn’t need to be huge lump sums. You can build a decent nest egg for the future just by saving small amounts regularly. Say you put £50 a month in a Cash ISA, after 12 months, you’ll have £600 aside, and after 24 months, your pot will be worth at least £1,200, excluding interest payments.

With a Cash ISA, not only are you guaranteed returns, you also get to keep more of your profits – think of it as being the cherry on the cake. Cash ISAs are a good saving option if you’re looking to build up an emergency fund, need money put aside to bring your short-term goals to life, or just want to give a little boost to your finances without taking much risk.

 

Should you put all your money in a Cash ISA?
How much you put in a Cash ISA is completely up to you and will generally depend on your financial situation and personal circumstances. But before you make your decision, it’s important to understand how Cash ISAs work over the long-term. As previously mentioned, paying into a Cash ISA is a great way to give your money a tax-efficient boost. However, this doesn’t take into account the potential impact of inflation on your savings. Inflation occurs when prices increase, and it can hurt your financial power. If your income doesn’t keep up with the rate of inflation, for example, you may be losing some purchasing power. By this, we mean that you may not be able to buy as much as you could before with the exact same budget.

Now the issue with saving is that over the long-term, your money could see its real value decrease. Let us explain, when you put money in a Cash ISA, you’re guaranteed to get back everything you put in, plus a bit of interest – the interest you get depends on the rate your bank, or building society, is offering. And to enjoy real growth, your savings will need to grow at least as the same pace as everything else, in other words - the interest rate you get should be at least equal to the rate of inflation. Every time it goes under, your savings will effectively grow slower than your living costs, and over time, your purchasing power could go down.

Obviously, we’re not saying to ignore Cash ISAs. They’re useful savings account that can help you build a decent nest egg for the near future and an emergency fund for all the unexpected events life will throw at you. But if you’re pursuing long-term growth, then, it could be a good idea to consider other options better suited to your goals. One way would be to find a Cash ISA offering inflation-beating interest rates. This requires a lot of research and constant monitoring to ensure your interest rate remains in line with the rate of inflation. Or, you could also consider investing in a Stocks and Shares ISA.

 

Why could it help to have a Stocks and Shares ISA?
With a Stocks and Shares ISA, also known as Investment ISA, your capital is at risk. What does it mean, you ask? It simply means that returns aren’t guaranteed and there’s a risk that you could end up with less than you initially put in. But that’s only one side of the story. With investing, there’s also a chance for higher returns as your potential profits aren’t tied to any fixed interest rate. Understandably, the uncertainty of investing makes it a bit scary, and many people are reluctant to take the plunge. However, over the long-term, investing tends to pay off. According to many studies, the longer you invest, the more likely you are to see positive growth – this is because of a phenomenon called ‘compounding’ where your profits, if reinvested, generate further gains as time goes, provided the environment is positive. But it doesn’t stop there, over time, investing could also provide you with inflation-beating returns. Take the FTSE 100, for example. Since 1983, the UK market has returned about 7.1% a year (with re-invested dividends)3 which sits well above 3.6%, the average inflation rate (RPI) for the same time period4.

If you’re comfortable investing, opening a Stocks and Shares ISA could be a great place to start. With a Stocks and Shares ISA, you don’t need to pay tax on any profits you make, meaning you can keep more of your gains. Every tax year, you can put up to £20,000 in your account (subject to change) – if you’re also paying into a Cash ISA and/or any other ISA type, remember that you cannot exceed £20,000 a year, so make sure you keep track of your contributions and don’t forget you have until the 5th of April (midnight) to use your ISA allowance!

 

How to open a Stocks and Shares ISA
The other benefit of having a Stocks and Shares ISA is that it’s very easy to open. With digital investment platforms, like Wealthify, it takes just a few clicks (or taps) to get started. You choose how much you want to put in – it can be as little or as much as you want. Then you select your investment style, and we’ll do the hard work for you, including things like picking the right investments and making adjustments to your Plan to keep it on track with your risk appetite and long-term goals. And once your Plan is all set up, you can access your dashboard and check how your investments are doing at anytime, anywhere – who knew investing could be that effortless?

 

References:

1: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/894771/ISA_Statistics_Release_June_2020.pdf

2: Data from Bloomberg

3: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23

 

Past performance is not a reliable indicator of future results.

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

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