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Are ISAs on the decline?

We take a closer look at why ISAs are on the decline and why investors shouldn’t write them off just yet.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There’s a staggering £584bn held in adult ISAs. But the popularity of ISAs has been declining in recent years.

In their heyday, one in four UK adults added money to ISAs in one tax year, 2008/09. ISAs were the go-to account for both savers and investors. Today it’s less clear cut.

The latest figures from HMRC run up to 5 April 2019. They showed people over the age of 16 put money into 11.2m ISAs in the tax year. That’s a significant drop of around 27% from the all-time high.

So what’s causing this decline in popularity? Are we watching the slow demise of Gordon Brown’s goal to make Britain a nation of savers again?

Losing interest and confidence

Interest rates play a big part in people’s appetite to save money. After all, one of the reasons interest rates are so low is to entice people to spend rather than save. And close to 80% of ISA holders choose a Cash ISA, so declining interest rates go quite some way to explain why ISAs as a whole are less popular.

Number of adult ISAs subscribed to in each tax year by type (thousands)

Source: HMRC up to 5 April 2019. Correct as at 21 August 2020.

In the 2018/19 tax year the average instant access Cash ISA rate was (and let’s face it, still is) pretty dire for savers. Although rates had recovered from their 2017 lows of 0.27%, there wasn’t a great deal on offer. You were lucky to be getting anything near to matching inflation.

And then there’s the Personal Savings Allowance.

Since April 2016, basic-rate taxpayers can earn up to £1,000 in savings interest each tax year before needing to pay tax. For higher-rate and additional-rate taxpayers this drops to £500 and zero respectively.

This might seem like a small change. But when interest rates are at near-record lows you now need a sizable pot to start worrying about tax, which for many negates the tax benefits of a Cash ISA.

With rates low and less valuable tax benefits, you’d expect demand for Cash ISAs to drop. And it did.

For Stocks and Shares ISAs, things were even worse. The 2018/19 tax year had the fewest people subscribing to a Stocks and Share ISA ever.

Think back and this might not be a surprise. There was an enormous amount of uncertainty around Brexit, and a deadline looming in March 2019. The fact an agreement looked unlikely by the deadline was a worry, and will likely have put off many Stocks and Shares ISA investors.

Retirees and first-home hopefuls lead the way

It isn’t all bad news.

Thanks to greater flexibility and higher allowances, the average value added to an ISA each year is a healthy £6,049, more than double the £2,639 of ten years ago. In total, people in the UK aged 16 or over put £67.5bn into an ISA in the 2018/19 tax year.

And as the chart below shows, for one age group Stocks and Shares ISAs have never been more popular, according to the most recent age group data available.

Number of people subscribing to Stocks and Shares ISAs each tax year by age (thousands)

Source: HMRC up to 5 April 2018. Correct as at 21 August 2020.

More people over the age of 65 subscribed to a Stocks and Shares ISA in the 2017/18 tax year than in any other tax year. Low interest rates seem to be the reason once more, as they make the stock market relatively more attractive to those needing an income from their capital.

It’s also encouraging, after years of continuous decline, to see an increase in the number of young people subscribing to a Stocks and Shares ISA.

Don’t write off ISAs just yet

You might feel more comfortable having a large proportion of your wealth in cash. But if your financial goals are five years away or more, then cash isn’t always the best option. Inflation is the general rise in prices of the things we pay for, which means the cash we have today won’t have the same buying power tomorrow. Over time, this can really add up.

While some Cash ISAs might be able to give you the chance to keep up with or even beat inflation, if you are willing to accept the risks, investing could give you a better chance of growing your money over the long term. This article isn’t personal advice, and unlike with cash savings, the value of investments goes up and down which means you can get back less than the amount you originally invest.

With speculation the government may need to raise taxes to pay for its coronavirus response, we think there’s still a long-term benefit for people using ISAs, and that they should remain the backbone of many savers’ and investors’ portfolios.

Deciding whether a Cash ISA or a Stocks and Shares ISA is right for you will depend on when you need to use the money. Remember that tax rules change and how much you benefit will depend on your circumstances.

Read more

Explore our Investment Times October 2020 edition for more articles like this.

See all articles

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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