Farewell Cash ISAs? Maybe not, but the idea of shelving these savings accounts is being talked about in the press. One reason is that thanks to the recent dismal UK growth projections, the government might need to drum up a bit of tax revenue and the sister of the Stocks and Shares ISA seems to have fallen squarely in the crosshairs.
Personally, I’m not worried. That’s not because I don’t use a Cash ISA and not because I don’t think it’ll happen, but because I think there are much better places to grow a bit of spare cash.
Why is this? Well, the Cash ISA is reliable and guaranteed, but also rarely pays back more than inflation. At the moment, the yield is 4% a year or so. That sounds fine, doesn’t it? Yes, but not when compared to the red-hot inflation of the last couple of years. You’d need 10% or so just to keep up!
A little deflating?
Studies highlight the issue. Data from Schroders showed the average return – in real terms – from a Cash ISA since 1999 was just 0.6% a year. The return in most of the 2010s was even negative thanks to inflation and almost 0% interest rates!
I know this phenomenon first-hand. I opened my first Cash ISA in that infamous 0% era. I chucked a couple of grand in one hoping to earn a few quid from it. When the statements came through, I was earning just a few pennies.
All this might sound a little deflating, but actually I’m encouraged that the Stocks and Shares ISA seems safe.
The government didn’t touch it in the Budget. In fact, it guaranteed it until 2030. And another reason the Cash ISA might get the axe is to encourage more investment in the stock market through the Stocks and Shares ISAs.
To show the true benefits of these ISAs it might be worth looking at one of the stocks I own, Lloyds (LSE: LLOY).
The bank paid a nice dividend of 4.62% on my stake last year, about what I might have expected in a Cash ISA all alone.
Dividends and gains
The yield as a percentage will fluctuate, of course, but whether it’s going up or down, the tax I pay on it won’t. That’ll always be 0% in an ISA. I’ll always get the full amount sent to me.
The share price looks low to me too. It’s still only 63p a pop despite multiple rounds of million-dollar buybacks which usually have upward pressure on the price.
Other banks have been shooting up too thanks to various factors. Barclays is up 106% in the last year. Natwest is up 116%.
If Lloyds shares follow that upward trajectory? The taxman won’t bother me. All shares held in an ISA are shielded from the capital gains tax imposed on such growth.
I should point out here that Lloyds is dealing with a legal battle around the misselling of car loans. No one can say quite how much the bank might be on the hook for and that will have investors worried.
Overall though, I think Lloyds shares are one for any investor looking to add a quality stock to their Stocks and Shares ISA to consider, particularly if the Cash ISA might indeed one day join the choir invisible!
