UK savers invested 28% more in stocks and shares ISAs in the 2015-16 tax year than they did in 2014-15 according to data from HMRC. The stocks and shares ISA is the cash ISA’s less popular sibling, just 20% of ISAs opened in 2015-16 were stocks and shares ISAs.
However, the average value of a stocks and shares ISA opened in 2015-16 was £8,443 which was 45% more than the average value of a cash ISA opened. UK savers were able to split last year’s £15,240 ISA allowance between cash and stocks and shares in 2015-16.
The changing ISA
This was the largest increase in the amount invested in stocks and shares ISAs since 2008-09 when savers could only have half of their £7,200 ISA allowance in cash. The ISA rules changed that year from a ‘maxi’ and ‘mini’ ISA to a much clearer cash or stocks and shares ISA.
According to Monevator a UK saver could get 6% tax-free interest in a cash ISA in 2008-09. Savers are now lucky to get 1.7% in a fixed cash ISA.1 It’s no surprise that individuals are now investing more of their ISA allowance.
It will be interesting to see what happens in 2016-17 as low interest rates and the introduction of the personal savings allowance has made the cash ISA redundant. There is next to no tax benefit to saving in a cash ISA now.
Time to invest more of your ISA allowance
If you saved your entire ISA allowance in the top fixed-rate cash ISA in 2016/17, you’d receive just over £230 in interest for the year. If you invested your entire ISA allowance in a stocks and shares ISA, achieving average returns of 4%, you’d receive £609 over the year.
When you put those two figures against each other many would gravitate towards the higher number. The reason many still don’t invest is because of the added risk involved, the value of your investment can go up as well as down and you may not end up with as much as you put in. That statement has to appear on many financial communications and it is that volatility that most savers understand.
But the real risk is that you don’t have enough money to reach your goals. Through time investing has been proven to outperform cash. The Barclays Equity Gilt survey shows you have a 75% chance of investments outperforming cash savings if you invest for five years.
The question is can you afford not to invest your ISA allowance? Over the last five years around 20% of savers have chosen a stocks and share ISA over a cash ISA and just under 30% of ISA contributions have gone to a stocks and shares ISA. But in 2015-16 around half of the overall value of all ISAs can be attributed to stocks and shares ISAs.