How safe are ISAs?

Saving money in an ISA can be a very safe way of growing your wealth over time, addressing the common question, “Is my money safe in an ISA?” However, this is not always guaranteed, as investing carries an inherent element of risk. Some savers, especially those asking, “Are cash ISAs safe?” or “How safe are stocks and shares ISAs?” are totally risk-averse, while others are prepared to take a degree of risk. This brings us to the crucial question – “Are ISAs safe at the moment?”

When discussing the safety of ISAs, it’s essential to define the type of ISA in question. “Is an ISA safe?” depends on the type of ISA as some offer more stability but lower returns, while others carry more risk but the potential for higher returns.

The types of ISAs include, Cash ISA, Stocks and Shares ISA, Lifetime ISA, and Innovative ISA, and Junior ISA. The distinction between the different ISA accounts is vital for understanding, for instance, “How safe is a Stocks and Shares ISA or investment ISA?” compared to its cash counterpart.

Investors pondering “Is ISA safe?” must consider their risk tolerance and financial goals. For those questioning, “How safe are ISAs?” it’s clear that while ISAs offer a tax-efficient way to save or invest, the level of safety varies. “Are ISAs safe at the moment?” Yes, but with caveats related to market conditions and the type of ISA chosen. This article goes into more detail.

Understanding the Safety of ISAs: Saving vs. Investing

It’s a common misconception to confuse “saving” and “investing.” The difference is fundamental to the notion of “safety” financially. So, let’s take a closer look.

• Saving is the process of setting money aside in a safe environment and allowing it to accrue interest. Instant access is desirable.
• Investing means using cash to buy assets that you hope will appreciate over time, potentially generating much higher returns.

So, to answer the question “How safe are ISAs?” Certain investment vehicles are relatively safe, while others inherently take on more risk. However, this is always dependent on circumstances, and you should do extensive research before committing any cash.

Are ISAs Safe in Times of Inflation?

In the current economic climate, with inflation at 4%, savers and investors are navigating a challenging landscape. The Bank of England’s decision to set interest rates at 5.25% for three consecutive quarters is a strategic move aimed at curbing inflationary pressures. However, the direct impact on savers is nuanced, as financial institutions are not obligated to match this rate for their savings accounts.

This means that despite the central bank’s aggressive stance against inflation, the real returns on traditional savings might not fully offset the erosion of purchasing power caused by inflation, and the real value of saved money can diminish over time, making it imperative for savers to carefully consider their options.

Investment ISAs emerge as a potential solution for higher returns amidst high inflation, but they carry risks associated with market volatility. The question of “Are ISAs safe?” during inflationary times is nuanced, hinging on the type of ISA (cash ISA vs. investment ISA), its returns in the current economic climate, and how these compare to the inflation rate. Strategic financial planning becomes essential, as savers must weigh the benefits of potentially higher returns against the backdrop of economic uncertainty and the varied responses of financial institutions to central bank rate adjustments.

Navigating this landscape requires staying informed and possibly seeking professional advice. While ISAs can offer a safer option if managed wisely, the inherent risks and variable interest rates underscore the importance of careful consideration and informed decision-making to safeguard savings against inflation.

Evaluating the Safety of Investment ISAs

In the tax year 2019/2020, the number of Stocks and Shares ISA subscriptions in the UK was 2.72 million. This figure rose to 3.93 million in the 2021/2022 tax year, a rise likely influenced by investors pondering “How safe are stocks and shares ISAs” and seeking the potentially higher returns offered by Stocks and Shares ISAs amidst fluctuating market conditions.

Bottom of FormThis fear was, of course, exacerbated by the Coronavirus pandemic. With COVID-19 decimating world economies, many people panicked, believing their investment portfolios would be similarly affected.  For a short while, it looked like that might be the case. Stock markets can be volatile, and prices can fall very quickly when something like a pandemic comes along. However, it’s also true that the markets recovered quickly.

Stocks and share ISAs are made up of stocks and shares, so let’s look at the S&P 500’s performance. the S&P 500 has had an annualized average return of around 10.26% since its inception in 1957. While the S&P 500 fell by approximately 34% from its peak in February 2020 to its trough in late March 2020, it reported a 26.28% gain in 2023 and set six new all-time highs in January 2024. This performance prompts investors to question, “Are ISA accounts safe?” especially when comparing the volatility and potential returns of stock investments to the relative stability of Individual Savings Accounts (ISAs).

So, when answering the question, “Are stocks and shares ISAs safe?” Yes, they are much safer than some think, provided they are being used as long-term investment vehicles. You could be in trouble if you are forced to take out money from stocks and shares ISA when the market has just collapsed. But, on the other hand, if you can afford to wait to ride out any storms that arise, the odds are very much in your favour that your portfolio will recover its value and grow over time.

Not for the inexperienced

The fact of the matter is that investing in stocks and shares does carry a certain element of risk. It’s certainly not something you should attempt to invest in yourself unless you have substantial experience, which is where wealth managers like Moneyfarm enter the picture.

The potential volatility in the equity market shouldn’t be underestimated – something which has been highlighted by the events of the past year and a half. While some investors are experienced enough to manage their own stocks and shares portfolios, it’s something that should often be left to the professionals.

When you open a stocks and shares ISA with Moneyfarm, you have several options open to you which relate to how your portfolio will be managed and the chosen risk level with which you feel comfortable. Your portfolio will be designed around your preferences and actively rebalanced to ensure it’s always fit for purpose.

The benefits of stocks and shares ISAs

There are several benefits to taking out a stocks and shares ISA.  First, you have a personal ISA allowance of £20,000 per annum. Any returns made on contributions to your ISA up to this sum are tax-free.

This type of ISA is effectively a tax wrapper. In addition to your personal annual ISA allowance, any interest your stocks and shares accrue is also tax-free – so are withdrawals. The biggest advantage, however, is the returns that stocks and shares ISAs can make, which often far exceed those made by “safe”, secure savings accounts.

Managing risk

The one thing to always bear in mind with any type of investment is that the value of your portfolio can go down as well as up. However, you can manage that risk to a certain extent by considering the following.

Diversification

The great thing about fully managed investment ISAs is that your portfolio will be built using an array of bonds, funds, and stocks. Less risk-averse investors can put most of their money into fixed-interest investments such as bonds. Those prepared to accept a slightly higher risk would invest in other equities with the hope of making higher returns.

Spread contributions over the year

Rather than making one lump contribution per year into your ISA, divide contributions over 12 months. Where markets are always evolving and changing, this allows you to utilise a well-established technique referred to as pound cost averaging.

Even with all of the suggestions made above, there will always be some degree of risk to investing in an ISA, which is why using the services of wealth management specialists like Moneyfarm can make all the difference.

FAQ

How safe are ISAs?

The safety of ISAs depends on the type: Cash ISAs are low risk but may not outpace inflation, while Stocks and Shares ISAs offer higher potential returns with increased risk of capital loss. Safety also hinges on individual risk tolerance and market conditions. Diversification and strategic planning are key to managing risks.

Is my money safe in an ISA?

Cash ISAs and Stocks and Shares ISAs are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per financial institution, offering a level of protection against the firm’s failure.

Are cash ISAs safe?

Cash ISAs are considered very safe in terms of capital protection, as they are similar to savings accounts, but the interest rate may not always keep up with inflation.