Look beyond cash Isas to stocks and shares

Interest rates on cash Isa accounts are too low and stocks do better over the long term. Consider a stocks and shares Isa instead.

The latest individual savings account (Isa) statistics are out and show that while we are flocking to put our money into Isas, we may not be choosing the best ones. The new figures relate to the 2018-2019 tax year and show that the number of people using cash Isas rose by 1.4 million, but stocks and shares Isa subscriptions fell by 450,000.

The decline is a worry when you consider how low interest rates are and that historically the stockmarket outperforms cash. “For a long-term saver, cash makes no sense,” says Holly Black on Morningstar.co.uk.

Black ran the figures and showed that putting £10,000 into a cash Isa paying 0.9% – the best current interest rate for an easy-access account – would produce a £2,522 return over 25 years. By contrast, if you had invested that £10,000 into the FTSE 100 over the past 25 years it would now be worth almost £45,000.

When it comes to savings accounts, the good news is that savers are returning to Isas after years of neglecting them as the Personal Savings Allowance (PSA), introduced in April 2016, meant you could enjoy tax-free returns in standard savings accounts. The PSA means basic-rate taxpayers can earn up to £1,000 a year in interest on their cash savings before it is taxed. However, the allowance shrinks as your income grows. Higher-rate taxpayers only get a £500 PSA and additional-rate taxpayers get no PSA. 

No wonder, then, the group with the most money tucked away from the taxman is the high earners. People with incomes of £150,000 or more have an average of £84,530 in their Isas. At the other end of the spectrum, “there is only a small difference in Isa wealth between low earners and those who would be considered well off but not the highest earners”, says Kate Palmer in The Sunday Times. Those earning £10,000-£19,999 have an average of £23,000 in their Isas, compared with £29,000 for people earning £30,000-£49,999.

How Isas help higher earners

While high earners clearly have more disposable cash to tuck away into Isas, they also have more incentive to do so. Not only do they get no PSA, they also pay more tax on the investments in their stocks and shares Isas. If you earn over £150,000, you pay 38.1% dividend tax, compared with 7.5% for basic-rate taxpayers and 32.5% for higher-rate taxpayers. 

The way the tax rules are structured mean a rising income could have a significant impact on how much tax you pay on your savings. A small pay rise, or annual bonus, could bump up your salary into the next tax bracket and have a dramatic effect on your savings tax bill. So it makes sense to build your savings within an Isa so that you know it is tax-free no matter what happens to your income.

One final interesting statistic is that almost a million more women hold Isas than men. But they are more likely to favour cash savings than stocks. This brings us back to equities’ superior long-term performance. While it makes sense to keep a cash savings pot for emergencies – enough to cover the bills for three to six months – over longer time periods stocks almost always vastly outperform cash. “Tell everyone you know, because based on these latest HMRC figures, it seems like the message isn’t getting through,” says Black.

Recommended

Bitcoin is down more than 50% since its all-time high. What is going on?
Bitcoin & crypto

Bitcoin is down more than 50% since its all-time high. What is going on?

Bitcoin, the world's most popular cryptocurrency, is trading more than 50% below its all-time high in November. Saloni Sardana explains why the digita…
24 Jan 2022
Which assets will benefit as the “jam tomorrow” bubble pops?
Investment strategy

Which assets will benefit as the “jam tomorrow” bubble pops?

With tech stocks, cryptocurrencies and many other “long duration” investments crashing hard, the “jam tomorrow” bubble looks to be bursting. John Step…
24 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Guillaume Pousaz of Checkout.com: the surfer dude catching the fintech wave
People

Guillaume Pousaz of Checkout.com: the surfer dude catching the fintech wave

Guillaume Pousaz moved to California to pursue his love of surfing, and landed in Silicon Valley. He then rode the fintech gold rush to a multi-billio…
23 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022