Rock bottom interest rates have led to the returns from cash ISAs being pretty useless. Especially when compared to the returns from stocks and shares ISAs that are invested in global equities.
So should you be ignoring cash ISAs?
Well, there is a handy little feature of cash ISAs that could still mean they are worth considering for some people. So don’t write them off just yet.
It’s not about the returns from cash ISAs
At the time of writing this article the best easy access cash ISA interest rate according to the ‘This is Money’ best savings rates tables is 0.60% per year.
Even if you were prepared to leave your money locked up for 5 years, the best rate you could get would still only be 1.35% per year.
Remember, at this point in time we are seeing higher inflation. The Consumer Price Index is at around 3% and predicted to go higher, meaning money held in a cash ISA at these rates is losing purchasing power.
Compare this to an investment in a global equity fund as illustrated by the Vanguard FTSE Global All Cap Index fund and you would have seen an annualised return of 10.96% over the last 3 years.
So clearly if you are investing for the future and growing your family wealth you shouldn’t be placing your money in cash ISAs. You should be focusing on stocks and shares ISAs instead.
However a cash ISA can be useful to have in certain situations and can actually help you build your stocks and shares ISA.
The best cash ISA feature
There are a number of scenarios when it’s a good idea to be holding more cash (above your emergency savings fund) than you usually need to.
This could be because:
- You have large expenses coming up in the short term.
- You will shortly be making gifts to your children or other family members.
- You like to be ready to take advantage of a market opportunity.
- You are just not sure how much and where you are prepared to invest right now.
Now you could hold this cash in a normal easy access savings account or you could use a cash ISA.
Cash ISAs and stocks and shares ISAs actually have the same annual allowance which is £20,000 per year per person. This means you could save/invest £20,000 into a cash ISA or a stocks and shares ISA. You can open both types of ISA in the same tax year but you can’t do the maximum allowance into both.
You could split the £20,000 e.g. £10,000 into a cash ISA and £10,000 into a stocks and shares ISA but you can’t do £20,000 into both.
If you don’t use your ISA allowance in a tax year then the ability to use that’s year’s allowance is lost forever.
This is where cash ISAs can be useful.
Let’s say you have some cash available and you and/or your partner have not used your ISA allowances for this tax year.
Now you might want to use this money soon so you don’t want to put it at risk in the stock market. Instead you could save it into a cash ISA (interest rate not important).
You might withdraw this money soon or circumstances might change and you don’t spend as much or any at all.
What’s important is that you have secured and used your ISA allowance for this tax year.
Now the fun part.
If you no longer need the cash you can just transfer the cash ISA into a stocks and shares ISA.
This action will not use any further ISA allowance as it’s a transfer rather than new money.
Better still. Some banks now offer what’s called a flexible ISA which means you can put money into a cash ISA, withdraw it and if you then find you don’t need the money or come into more money you can put the money back into an ISA in the same tax year without it impacting your allowance.
This is all about keeping your options open and not panicking.
This process is particularly useful at the end of a tax year when there is a rush to use your ISA allowance but you are not sure where to invest. Don’t worry at this point and just use a cash ISA. You can then transfer it to a stocks and shares ISA and invest it at a later date.
Are you growing your wealth in the most efficient way? Remember you don’t know what you don’t know. Why not book a slot for an initial conversation at our expense where we would be happy to go through your plan and make suggestions where we feel appropriate.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.