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UK cash ISAs earnings in 2021 lowest in 20 years

LaToya Harding
·Contributor
·3-min read
Interest rates on cash ISAs are at record low but deposits have swelled, according to a study. Photo: Getty
Interest rates on cash ISAs are at record low but deposits have swelled, according to a study. Photo: Getty

Record low rates on cash ISAs mean that the typical UK household, with £11,600 ($16,154) worth of savings on average, will earn just £47.85 of interest this year, generating tax relief of around three cups of coffee at only £9.57, new data has found.

According to research from Janus Henderson Investment Trusts cash ISAs currently have near record balances, however, total interest paid on all cash ISAs in 2021 will be the lowest in 20 years. This is roughly half the level in 2020.

The total amount of interest that banks, building societies and NS&I will pay to cash ISA savers this year is just £1.22bn, the lowest level since 2000, which was the first full year in which ISAs operated.

This 20-year record low comes even though balances are now 14 times greater than they were by the end of 2000.

Bank of England data recently showed that variable rate cash ISAs only now earn 0.35% including any bonus, while those with rates fixed for a year will earn 0.49%. These are the lowest rates ever seen since ISAs were introduced in April 1999.

Janus Henderson Investment Trusts found that the average UK equity income trust will provide savers 10 times more income than cash in 2021 for the same amount saved, equivalent to £486 per saver.

Chart showing total cash ISA savings. Source: Janus Henderson Investors using Bank of England data, February 2021
Chart showing total cash ISA savings. Source: Janus Henderson Investors using Bank of England data, February 2021

Many ISA savers have far higher balances than the median, meaning that the missed opportunity is even greater.

Investment trusts may also provide opportunity for long-term capital growth. £1000 in a cash ISA in 1999 would be worth £1,705 now, compared to £5,755 for the average investment trust.

James de Sausmarez, director and head of investment trusts at Janus Henderson Investor, said: “Nobody will be popping the champagne to celebrate all the tax they’ve saved on their cash ISAs this year, not least because the tax relief wouldn’t even pay for half a bottle.

“Having slashed savings rates to record lows, banks and building societies are sending a very clear message that they simply do not want any more cash deposits. When someone sends a message this loudly it pays to listen.”

He added: “As with all investing your capital is at risk as the value can fall as well as rise, but for long-term investors investment trusts could provide a preferred alternative to cash.

"Not only do they pay income far in excess of anything that can be earned on cash deposits, but they also offer the prospect of capital gains too. All that income and all those capital gains are sheltered from tax if they are held within an ISA.”

READ MORE: Investment account that attracts more cash from millennials than baby boomers

It comes as Bank of England (BOE) governor Andrew Bailey told BBC’s Today programme on Monday that he was looking at “new tools” to deal with the economic fallout, which could include negative interest rates.

"That's not a view on whether we will use them or not,” he said. “"The economy will actually get back at the end of this year to where it was at the end of 2019.”

Bailey said the Bank expected inflation to start rising towards its 2% target in "the next two or three months," adding that the Monetary Policy Committee would need to see "a lot more evidence" that the inflationary trend was sustainable before acting, given the "huge uncertainty" over the economic effects of COVID.

"We are not out of tools, we are not out of firepower," he said.

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