Making mistakes is somewhat inevitable when it comes to money. We buy things we don’t need or never use, perhaps getting into debt in the process. We shower cash on stuff we believe will bring us long-lasting happiness without recognising that the joy we get from new possessions quickly diminishes.
Even when our goals are admirable — such as saving for a more comfortable retirement — the strategy being used is often less than optimal. I’d lump saving with a cash ISA firmly within the second camp.
Based on recent research, however, it looks like many of us are still doing just that.
According to HMRC, the share of cash ISA subscriptions as a proportion of all ISA subs was 72% in 2017/18. What’s more, the amount of cash plowed into these accounts actually rose (albeit only very slightly) to around £40bn.
The lure of cash
Don’t get me wrong — I understand why saving into this kind of account looks sensible to many Britons.
First, cash isn’t volatile like some assets. If you move money into a cash ISA at the start of the tax year, you can be sure that you’ll have the same amount by the end of the year (plus interest). In the fragile political and economic climate we’re in, that’s comforting, as is the fact that you can get access to your money whenever you want.
Second, saving into this wrapper means that you don’t pay any tax on any of the aforementioned interest you receive.
Problem is, these ‘advantages’ can be easily challenged.
The bad news
For one thing, the level of interest on instant access cash ISA accounts remains paltry. The best you can hope for at the current time is 1.5% according to Moneysavingexpert.com. That’s below the savings rates of some current accounts.
That 1.5% is below inflation too. This means your money is losing purchasing power the longer it sits there. They don’t call it the ‘silent killer’ for nothing.
The tax benefits are also questionable. Thanks to the annual savings allowance, most people won’t end up owing the taxman anything on the interest they receive anyway, even if it’s outside the ISA wrapper.
A better strategy
Now, having three to six months worth of expenses saved in cash is a great idea and can help pay for any unexpected costs that crop up.
After this, however, it won’t come as a surprise that I believe those focusing on building a better retirement should be putting that money to work in a stocks and shares ISA. Not only do these accounts shield owners from income tax (on dividends), they also protect you from needing to pay capital gains tax on any profits you make.
Sure, the stock market can be volatile, but this shouldn’t matter to anyone investing for decades rather than days. Over time, equities have been shown to consistently outperform every other asset class. If you invested the full ISA subscription (£20,000) today and did nothing for 30 years, you’d have more than £150,000 by 2049, assuming a 7% annual return.
So, as we approach the ISA deadline (5th April), have a think about whether you’re making the most of your allowance.
For me, throwing any surplus cash into a diversified portfolio of dividend-paying stocks with bright futures will always be a far better strategy for making your twilight years as comfortable as possible.
