Cash Isa surge leaves savers vulnerable to inflation

Finance experts warned that a surge in cash Isas would leave savers earning “paltry returns” as the level of funds held in all types of individual savings accounts (Isas) rose to a record £620bn in 2019-20. 

The savings growth trend recorded in the 2019-20 tax year is likely to have accelerated in the pandemic, as lockdown restrictions made it difficult for those with disposable income to spend on travel or going out. 

About 13m adult Isa accounts were set up in 2019-20 — almost 2m more than in the previous tax year. The cumulative total saved in Isas hit a record level after rising 6 per cent in 2018-19, according to figures released by HM Revenue & Customs on Tuesday. 

While the annual Isa tally showed high levels of saving, most of the money went into cash Isas, which offer low rates of interest and could leave savers vulnerable to rising inflation.

Some 300,000 new subscriptions went to stocks and shares Isas, compared with 1.2m new subscriptions for cash accounts. The amount put into cash Isas was up by £4.8bn or 11 per cent on the previous year; for stocks and shares Isas it was £1.6bn or 7 per cent higher.

Tom Selby, senior analyst at investment broker AJ Bell, said there was nothing wrong with investing in cash Isas, particularly for those who needed quick access to the money. “But the returns on offer remain paltry, with the best easy access cash Isa paying just 0.46 per cent, according to Moneyfacts,” he said.

Inflation posed “one of the biggest risks” to cash investors in the coming years, he said, arguing that a stocks and shares Isa offered better protection against the rising cost of living. “Anyone with a longer-term time horizon who is concerned about the impact of rising prices on their funds and happy to take some investment risk should consider putting at least some of their portfolio in stocks and shares.”

Amy Pethers, financial planner at wealth manager Brewin Dolphin, said it was a “lost opportunity” for savers, pointing to research showing cash held from 2011 to the end of 2020 would have lost value in real terms, whereas the FTSE All-Share index showed a total return of 46 per cent over the same period. 

“If these investments were held in an Isa, you would have the added benefit of no tax to be paid on the income or growth,” she said. Individuals may put £20,000 into an Isa in each tax year with no tax due on share dividends, capital gains or interest.

Slightly more women than men took up an Isa in the year, at 5.4m against 4.8m. However the average amount subscribed by women in their Isas was nearly £3,000 less than the average for men, reflecting women’s lower average earnings and less secure sources of income. Women were also more likely to take out a cash Isa alone than men and much less likely to subscribe to a stocks and shares Isa, making them more at risk of losing out in the long term from inflation.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the Isa “gender gap” had doubled to reach £3,000 over the past decade, and would widen further if women continued to put their money into lower-return options. “Unless women engage with investment, regardless of what they can afford to put aside for the future, the gender Isa gap will continue to grow.”

The number of people signing up to a Lifetime Isa more than doubled to 545,000. Designed for first-time buyers and retirement savers, this type of Isa can be opened before a saver’s 40th birthday and all payments made into them receive a 25 per cent bonus from the government, up to an annual maximum bonus of £1,000.

Selby of AJ Bell said many of those who invested in Lifetime Isas (Lisas) before the pandemic will have subsequently used the money to buy a home in 2020-21.

“The availability of Lisa funds tax-free where they are used for a first home purchase will have helped thousands of people get a foot on the property ladder — and may also have combined with the stamp duty cut to drive the house price boom we have seen over the last 12 months.”