Britons are saving less money in cash Isa accounts as inflation mounts, and seeking greater returns by investing in stocks and shares.
The number of cash Isa accounts opened fell by 1.6million in the 2020/21 tax year compared to the previous 12 months, according to new HMRC figures, whilst the amount paid into them plummeted by £12billion.
In contrast, 3.6million people opened a stocks and shares Isa, a year-on-year rise of 860,000.
A record £33.9billion was stashed into stocks and shares accounts in the tax year ending in 2021, which was £10billion more than in the 2019/20 tax year.
Investors put a record £33.9billion into stocks and shares ISAs in the tax year ending 2021
It means that now only two thirds of all Isa accounts are held in cash, the lowest proportion recorded since the Isa rules were changed in the 2008/09 tax year.
In the 2019/20 tax year three quarters of all Isa accounts were in cash, whilst in the year before the introduction of the personal savings allowance in April 2016 as much as 80 per cent of all Isas were held in cash accounts.
An Isa is essentially a shield that protects savings or investments from being subject to taxation. Up to £20,000 can be saved or invested in a given tax year.
Rock-bottom savings rates and a stock market bounce following the initial crash in early 2020 are thought to be behind the shift.
By the end of the tax year Britons held a total of £687billion in Isas – up 11 per cent in a year, and driven by a 31 per cent rise in the value of funds held in stocks and shares Isas.
Around 12 million Isa accounts were used in 2020/21, down from 13 million in 2019/20
Sarah Coles, senior personal finance analyst at wealth manager Hargreaves Lansdown, said: ‘The early months of the pandemic gave people the time, money and enthusiasm for investment that saw an enormous boost in stocks and shares Isas.
‘There’s a good chance that people had the space to weigh up the potential benefits of each, and decided that the money they were putting away for the long term may be better off in the stock market.’
Why is this happening?
Many may have been attracted to investing by the prospect of big returns, as the interest paid on Isas and other cash savings accounts is no match for rising inflation.
The FTSE 100 index, which lists the biggest 100 companies by market value on the London stock exchange, went from a low of 4,994 points in March 2020 to almost 7,000 by end of the 2020/21 tax year – potentially spelling big returns for those with their savings invested in the stock market.
Meanwhile as the tax year came to end in April last year, the best easy-access cash Isa deal across the entire market paid just 0.4 per cent.
While stocks and shares Isas can offer better returns, the value of your savings can also go down if your investments don’t perform well – so they are a riskier option than cash Isas.
Isa Isa baby: Using your Isa allowance means you have no tax to pay on any dividends, growth, interest or income you get from your investments up to £20,000
Adrian Lowery, financial analyst at online investment platform, Bestinvest said: ‘In a world of rock-bottom interest rates savers have been searching for better returns by turning to investing.
‘After the initial shock of the Covid crash that hit the stock markets from February to April 2020, it seems that savers gathered their nerves.
‘Typically, stock markets rebound from sudden crises, and a crash in those sorts of circumstances can sometimes be a good time to enter the market.
‘There was also doubtless a momentum effect as markets, and particularly certain sectors like tech, healthcare and green projects, then proceeded to soar for the following 18 months, buoyed by vast stimulus programmes from Government and central banks.’
Around £72billion was stashed into Isa accounts in 2020/21, a decrease of £2.4billion compared to 2019/20. This decrease was driven by the fall in cash Isa subscriptions
Although the bumper returns of the stock market would have caused some who usually opt for cash opting to invest instead, there are likely other factors at play.
Britons paid £72billion into 12million adult ISAs in the tax year 2020/21 – down from the £74.4 billion of new deposits made into 13 million accounts a year earlier – suggesting some lacked the disposable income to save or invest.
Coles added: ‘Unfortunately, some of the fall in cash Isas will be because of the toll the pandemic took on many people’s incomes.
‘We know that the higher your income, the more likely you are to open a stocks and shares Isa rather than a cash Isa.
‘During the first year of the pandemic, those on higher incomes were more likely to have kept their income and seen their outgoings drop – so they had more money to invest.
‘Meanwhile, those on lower incomes were more likely to have lost some of their wages and still faced the same outgoings – so they had nothing spare for saving.’
As the cost of living crisis continues to hammer Britons, the number of cash Isa accounts is likely to continue to fall.
Households’ weekly savings are expected to fall by an average of 128 per cent this year as Britons’ take-home pay fails to keep pace with rising inflation, according to data from Scottish Friendly and the Cebr.
Should savers pick cash or stocks and shares in 2022?
For those able to make use of their Isa allowance this year, stocks and shares may seem like a risk given that some of the country’s biggest and most popular investment funds have seen sharp price falls over recent months.
For example, the country’s biggest investment trust, Scottish Mortgage with assets valued at more than £11billion is down by more than 45 per cent in the past six months alone.
Fundsmith Equity, a £23.7billion fund run by star investment manager Terry Smith, is down almost 13 per cent in that time.
This comes all at a time when savings rates are rising, albeit gradually.
Thanks in part to the Bank of England’s successive base rate rises, cash Isa rates have made somewhat of a comeback.
The tax protector: You can think of an Isa as a shield that protects your savings or investments from being subject to taxation
The best paying easy-access cash Isa, offered by Marcus Bank, pays 1.3 per cent, whilst the best one year fixed rate cash Isa deal, currently offered by Gatehouse Bank, pays 1.86 per cent.
However, those preferring to keep their cash in savings may still continue to shun Isa deals in favour of non-tax-free savings rates.
Fixed-term savings deals in particular tend to outperform their Isa counterparts. The best one-year bond for example pays 2.56 per cent – 0.73 per cent more than the best Isa account.
>> Compare today’s best savings rates with This is Money’s independent tables
And many savers won’t need the tax free Isa wrapper due to their personal savings allowance.
This allows basic-rate taxpayers to earn their first £1,000 of interest a year tax-free in an ordinary non-Isa account, whilst higher rate payers get a £500 allowance.
At a time of such low interest rates, the majority of those who have cash to put into savings are unlikely to breach the allowance.
Laith Khalaf, head of investment analysis at AJ Bell said: At an interest rate of 1 per cent, a basic rate taxpayer would need £100,000 in cash before they benefited from the cash Isa wrapper, as a result of the personal savings allowance protecting that level of interest from tax anyway.’
Until rates rise high enough, some may therefore opt for an ordinary savings account where they could make marginally more on their cash.
However, regardless of where Britons decide to save, their savings will ultimately be losing value in real terms.
With inflation soaring at a 40-year high of 9 per cent, there is not one savings account that will protect your cash from being gradually eroded.
40-year high: Inflation reached 9 per cent as of April and not one savings account can keep up
Many Britons may therefore continue to be tempted to invest to prevent their cash losing value in the long term.
Lowery added: ‘While it is wise to hold some cash savings for emergencies, with inflation now rampant it is unwise to hold too much in cash for long periods of time.
‘Despite recent stock market volatility, over the longer term investing in equities has consistently proved to be one of the best ways of getting inflation beating returns.
‘However, it is risky for investors to try to time the market, and rather it is better practice to buy into investments at regular monthly intervals.
‘This gives you the best chance of riding out volatility, which global markets continue to suffer from given a whole new set of concerns.’