"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’"
Newly released figures from HMRC show continued huge flows into cash ISAs, reinforcing concerns about poor returns for long-term investors.
Aggregate figures for 2014/15 and 2015/16 show that around £120 billion was invested into cash ISAs over the period, compared with just £43 billion into stocks and shares ISAs. The surge in flows into cash follows a large increase in the limits for cash ISA investing in July 2014, with a previous annual cap on cash investing of £5,760 raised to £15,000.
The HMRC analysis shows that 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.
Younger people are particularly likely to hold money in cash; for example, 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.
A recent Royal London policy paper, ‘the Curse of Long-Term Cash’ found that investors have 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 says these latest figures reinforce the concern that investors are holding excessive amounts in accounts with low interest rates which deliver negative real returns once inflation is taken into account.
It believes the temptation to invest long-term savings in cash is set to increase with the further uplift in the ISA limit to £20,000 in April 2017.
Helen Morrissey, Personal Finance Specialist at Royal London, said: "Saving in cash clearly has a part to play for short-term emergencies and rainy day savings. But a combination of low interest rates and rising inflation means that money in a cash ISA is losing spending power, year after year. The data also shows that lower income households and younger savers are particularly at risk of losing out. While cash ISAs have a role to play investors must also consider the benefits of the investment returns gained from stocks and shares ISAs.
"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."
