The end of the line for cash ISAs

Reasons NOT to open a cash ISA

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Interest rates aren’t keeping up with inflation

Even if you’re still earning your introductory rate, most cash ISAs are failing to offer savers any real growth on their hard-earned cash. Today’s best instant access deals rarely get above the 1% mark and once the introductory period ends, your rate can plummet to as little as 0.1% p.a. according to the FCA’s Sunlight remedy report. Coupled with indications that inflation is on the rise, more and more savers will start to see their cash savings pots shrinking in real terms.

The banks don’t want your cash

The dismal savings rates offered by high street banks and building societies aren’t entirely down to the base rate being stuck at 0.25%. Some banks don’t need to compete for new savings customers (the traditional source of the money they have available to lend), because there’s already enough money in the system to fund their lending activity, so they keep rates low.

Your personal savings allowance is enough

With most cash savers seeing negligible returns, it’s unlikely you will need to use a cash ISA to protect them from the tax man. Basic-rate tax payers don’t pay a penny of tax on the first £1000 they earn on their savings thanks to the annual personal savings allowance, introduced in 2016. It’s applied automatically to any savings you hold, so you don’t need to do anything, and for the majority of savers with an average size savings pot, this will be more than enough of a buffer.

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Stocks & shares ISAs are simple

It can take as little as 10 mins to set up a stocks & shares ISA online. You don’t even need to pick the investments to put in it, if that’s not your cup of tea. Some providers will pick a basket of investments and manage them on your behalf in return for a simple annual fee. Best of all, stocks & shares ISAs can be just as flexible as a savings account. Your money isn’t locked away and you can withdraw it whenever you like, without any penalty.

Investing is generally better in the long-term

For years, people have argued the pros and cons of cash ISAs vs stocks & shares ISAs, but with cash savings returns hit hard by historic low interest rates, the stocks & shares ISA is gaining ground on its old adversary.

Of course, there’s still risk that with a stocks & shares ISA you might get back less than you put in, as opposed to the guaranteed return you get with a cash ISA, but as long as you think long-term, investing will generally provide a better return. According to a long-running Barclays survey, over a 10-year period, there’s a 90% chance your investments will outperform cash savings.

 

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

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

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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.

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