With the end of the tax year less than a week away, new research reveals that the majority of ISA holders prefer cash ISAs as opposed to stocks and shares ISAs.
So, why might the popularity of cash ISAs be a problem in the current climate? Let’s take a closer look.
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What did the data reveal about ISA holders?
According to a survey by Aviva, 75% of ISA holders prefer to keep their money in cash, suggesting the majority are choosing to avoid stocks and shares ISAs.
The survey also reveals how 15% of respondents believe it’s easier to pay into an existing cash ISA. Meanwhile, 11% say they have concerns about being able to withdraw funds from a stocks and shares ISA.
The survey of 3,000 ISA holders also highlights the three most important factors they consider when making investment decisions. These factors include:
- the level of return
- the ability to withdraw funds at will
- low fees and charges
In terms of the ability to save regularly, 71% of respondents say they are saving at least something every month. This can be seen as an encouraging statistic given the UK’s soaring cost of living right now.
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ISA holders prefer cash ISAs: why does it matter?
We know that three quarters of ISA holders prefer keeping their savings in cash. However, this could be a major problem for one reason: the UK’s rising inflation rate. Right now, the UK inflation rate stands at 6.2%. And the Bank of England suggests it could hit 8% by the beginning of summer.
According to Aviva, rising inflation would make £10,000 in a cash ISA worth just £8,500, in real terms, by 2027. That’s assuming the UK’s inflation rate moves in line with Office for Budget Responsibility forecasts. Of course, it’s possible that inflation could go even higher.
While this £8,500 figure doesn’t consider interest earned, rates on cash ISAs are currently dire now anyway. Right now, the highest easy access rate available is just 0.85% – far below the rate of inflation.
While there are other types of ISAs available, stocks and shares ISAs are the most common after cash ISAs. Typically, returns from investing outperform interest rates offered on cash accounts. As a result, many ISA holders could be inclined to ditch their cash ISAs and invest instead.
‘Natural nervousness’ towards investing
Richard Kelsall, Aviva’s senior propositions manager suggests there are two reasons for the general reluctance towards opening stocks and shares ISAs. He explains: “There is a natural nervousness about investing in the stock market right now, but there is equally a lot of confusion about what a stocks and shares ISA can and cannot offer you.
“It is more than 30 years since we last saw inflation at its current level and so for many, today’s rising prices are a distant memory and for some it is entirely new, uncharted territory.
“Clearly the cost of living squeeze means that not everyone can afford to save anything right now, but those with a little extra to spare can often make their savings work much harder for them.”
While Kelsall doesn’t specifically tell cash ISA holders to invest, he does highlight the benefits of a balanced portfolio. He explains: “Overall, a portfolio of different types of assets is generally considered to be balanced and robust enough to provide good returns over the longer term. It’s also vital to shop around for the best deal and take advantage of the tax allowances available.”
Are you looking to open a stocks and shares ISA? If you’re keen to act before the 5 April ISA deadline, take a look at The Motley Fool’s top-rated stocks and shares ISAs.
As with any investment, be aware that the value of your portfolio can fall as well as rise. If you’re new to investing, see our investing basics guide to learn the ropes.
