What is it with cash ISAs? British savers love them, pouring tens of billions into the tax-free savings accounts every year. And what do they get in return? A slap in the face. Here’s why you should declare an end to your personal cash ISA affair.
Love is the drug
They may be free of tax, but they still carry a hefty price tag. The UK’s cash ISA addiction has cost savers an incredible £127bn over the past two decades, according to new research from Scottish Friendly and the Centre for Economics and Business Research. That’s how much Britons have missed out on because of their reluctance to invest in the stock market.
Yet even though stocks and share ISAs have delivered far better returns over the longer run, Britons cannot renounce their passion for the cash equivalent, which remains vastly more popular. Four out of 10 people save into a cash ISA, more than double the amount (just 18%) who invest into a stocks and shares ISA.
127 billion reasons
Savers have earned a total of £75bn in tax-free interest since cash ISAs were first introduced in April 1999, based on HM Revenue & Customs figures. They could have earned £202bn if they’d invested in the stock market instead. That’s £127bn more!
Interest rates on cash ISAs have plummeted in the decade since the financial crisis, while the stock market has grown strongly, despite October’s turbulence.
Savers who had used their full cash ISA allowance every year to 1 October would have accrued an average of £20,628 in tax-free interest, less than a third of the £70,987 they would have achieved from a stocks and shares ISA. Yet the affair drags on, regardless of the cost.
Don’t be scared
One problem is that getting started with investing seems daunting, with a quarter saying they don’t understand stocks and shares. A few visits to Fool.co.uk should help with that.
Around a third either fear losing money, or simply prefer the security of cash. But that doesn’t mean you should shun shares altogether when there’s plenty you can do to reduce the risks. First, you should never invest money you’re likely to need in the next five years, to give you time to recover from any crash. As you get older, you should also reduce your exposure to shares, shifting money into lower-risk alternatives, such as bonds and, yes, cash ISAs.
Break the habit
However, if you’re saving for long-term goals such as retirement, then cash ISAs will only eat your wealth. The average easy access account pays just 0.5% right now, while inflation stands at 2.4%. This means the value of your money is falling in real terms.
Cash ISAs have lost their looks due to the toxic combination of pitiful savings rates and rising inflation, but savers still swoon out of habit. It’s time to let go and move on, at least with some of your savings pot. These 2 investment trusts could help you get started.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.