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Beware 'dash for cash', warns Royal London Calls for lower cash ISA allowance

May 3, 2017

Chris View; I think that the introduction of the £20,000 ISA allowance this tax year and now  cash and stocks and shares ISA with the same limits has simplified what I think was confusing to many customers. As an IFA ISAs play a huge part in the advice process and in my experience clients often did not know about how stocks and shares ISAs work and see the cash ISA as a simpler vehicle to invest with no need for advice. Obviously, if investing long term it is seen that Stocks and shares generally outperform cash. However, there are risks and the value of your investment is not guaranteed unlike the underlying value of your cash ISA. That said, there is risk to a cash ISA and this is the erosion of inflation. If inflation is say 2% per annum and your returns are 1% per annum then your value in real terms ins falling.

 

If you would like to know more about ISAs and how they work then please feel free to contact me.

 

Read the full article here:

The warning comes as aggregate figures for the 2014/15 and 2015/16 tax years released by HM Revenue and Customs (HMRC) show some £120bn being directed into cash ISAs over the period. In comparison, £43bn was invested into stocks and shares ISAs.

Royal London said the surge in flows into cash followed the large increase in the limits for cash ISAs in July 2014 - when the annual cap was raised from £5,760 to £15,000 - and predicted this trend would only continue following the further increase in the overall ISA limit to £20,000 from last month.

More detailed analysis by HMRC of the 2014/15 tax year data suggested lower-income investors are more likely to favour cash. In 2014/15, all income groups under £30,000 per year were more likely to hold their ISA savings in cash-only products, whereas the reverse was true for those earning more than £30,000 per year.

The HMRC analysis also suggested younger people were particularly likely to hold money in cash. As an example, Royal London pointed out that, of the £971m subscribed into ISAs by the under-25s, £927m went into cash-only ISAs - by far the highest proportion of any age group.

In February, a Royal London policy paper, The Curse of Long-Term Cash, argued investors had lost £100bn in returns over the last decade by being invested for the long term in low-return cash ISAs rather than investing in a diversified stocks and shares ISA.

Royal London personal finance expert Helen Morrissey said: "Saving in cash clearly has a part to play for short-term emergencies and rainy-day savings."

However, Morrissey pointed out a combination of low interest rates and rising inflation meant money in a cash ISA would be "losing spending power, year after year".

She added: "These latest HMRC figures reinforce the concern investors are holding excessive amounts in accounts with low interest rates that deliver negative real returns once account is taken of inflation.

 

"The government needs to think carefully about its ISA policy and should consider reintroducing separate lower limits for cash ISAs to avoid a ‘dash for cash' costing savers dearly'."

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