In May, savers invested £1.2bn in ISAs, which was more than double the previous May. Brexit uncertainty sent savers running for Cash ISA security, but I don’t think this is necessarily the best place for their cash reserves.
The Cash ISA had lost its shine in recent years, partly because of the low-interest-rate environment we’re living in and partly because tax changes mean you’d need a very large amount of savings before a Cash ISA would be more beneficial than an ordinary savings account.
Alternative to saving
The Bank of England (BoE) has cut interest rates several times in recent years and with so much political uncertainty hovering like a dark cloud over Britain, it’s unlikely rates will be increased anytime soon. This means any cash kept over the long term could depreciate in value. That’s why I prefer to invest my money in the stock market.
Although it’s not entirely without risk, I think there are two main benefits to investing in stocks. By choosing well-run companies offering a reliable dividend, my investment has the potential to grow significantly over time. It also gives me the chance to see my initial investment appreciate in value if the company does well. This can be through slow and steady growth or the possibility of an unexpected windfall.
For the 2019/20 financial year, the ISA allowance is £20k. This is the maximum you can pay into your ISA throughout the year. If you use this allowance to invest in stocks, then any gains you receive can be kept in the ISA.
My reasons to avoid a Cash ISA
Reason 1: Tax on interest gains. The personal savings allowance brought in to play in April 2016 entitled basic rate taxpayers to earn up to £1,000 on savings income tax-free. You’d need upwards of £67k saved at 1.5% interest rate before a Cash ISA offers tax savings. Let’s face it, £67k is a large amount of money and few of us are lucky enough to have that sitting around.
Reason 2: Interest rate uncertainty. The BoE interest rate is currently 0.75%. At the beginning of November, two members of the BoE key policy body stated they’d voted for cheaper borrowing in response to Brexit and global trade war threats. This has increased the likelihood of UK interest rates being cut further in the coming months. This will further depreciate cash value, leading savers to look elsewhere for a better return on their money.
In unsettled political times, I think it’s pertinent to keep some cash on reserve for emergencies or bargain stock purchases. Saying that, I don’t think saving all your money in cash, if it’s a significant amount, is such a sensible decision. If you have a regular cash sum to invest such as £500 monthly, then the stock market can offer a financial pathway to future riches.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019