Changes to the Individual Savings Account (ISA) seem imminent as the government tries to get the country investing. Rumour has it that the Chancellor will halve annual allowances on the Cash ISA to £10,000 at the Budget on 26 November. It’s a strategy some believe could supercharge individuals’ long-term returns.
Slashing allowances aren’t a plan I’m especially impressed by. I think a carrot rather than a stick approach is better on matters of personal finances.
That said, if it helps people make substantially more cash for retirement, that may not be a bad thing. Fresh research from IG Group this week underlines the possible benefits that nudging people towards the stock market can have.
A £9k boost
According to the investing platform, “redirecting excess cash into investing could improve returns by over £9k per person across five years“.
In total, halving the Cash ISA allowance could provide savers with more than £7bn if this cash was reinvested in the stock market, IG said.
The broker found that roughly 2.8m Cash ISA users save more than £10,000 each year. Meanwhile, YouGov data shows that 28% of this group would invest any money above the new allowance in a Stocks and Shares ISA.
IG said that “combining these figures, [our] analysis estimates potential additional returns of £7.2bn over five years for this group of around 784,000 savers — equating to over £9.1k per saver“.
These figures are based on industry forecasts for UK interest rates over the next five years, alongside historical returns from global stock markets.
Here’s what I’m doing
I’m one of millions of people who use both a Cash ISA and a Stocks and Shares ISA. I also purchase shares, trusts and funds in a Self-Invested Personal Pension (SIPP).
The vast majority of my spare cash is put to work on the stock market. For me, this strategy’s a no-brainer. The average investing ISA has delivered a 9.6% return since 2015, according to Moneyfacts. For the cash product, this sits way back at 1.2%.
I realise that my decision carries higher risk. But the way I spread my capital — my portfolio provides exposure to thousands of stocks the world over — means I’m not putting my cash in excessive danger as I chase better returns.
One low-risk asset I’ve just bought is the iShares Core MSCI Europe UCITS ETF (LSE:SMEA). As with any shares-based fund, it can fall when broader equity markets suffer. However, its diversification across dozens of industries and countries provides significant long-term risk benefits.
In total, this iShares product holds shares in 1,011 different companies. I think it could continue outperforming as investors rotate from US shares and economic conditions in Europe improve.
Since 2015, it’s delivered an average annual return of 8.4%, far above what even the best-paying Cash ISA has delivered in that time.
This is one of more than thousands of ETFs UK investors can choose from today. With even more individual stocks and investment trusts available, share pickers have a significant opportunity to target decent returns without having to take on excessive risk.
