Are Cash ISAs still a good way to save for the future?

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Are Cash ISAs still a good way to save for the future?

With the price of many goods and services rising, households across the UK are having to manage their finances more carefully than ever before. If you’re trying to get the most out of your money, it can be a good idea to look at different ways of growing your wealth. For many years, Cash Individual Savings Accounts (ISAs) have been a popular way of saving money, due to their tax-efficient status. According to data from Morningstar, they made up three-quarters of all ISAs opened in the 2019/20 tax year. However, with relatively low interest rates and high inflation, you may be wondering whether they are still a good way to save. Read on to find out if this is true, as well as a potential alternative.

Savers have struggled with low interest rates for several years

As you’ll know, building good saving habits is a cornerstone of good financial planning. One of the most important parts of choosing where and how to save your money is finding a provider who offers you a reasonable rate of returns. However, in recent months that has been tricky to do, as during the pandemic, the Bank of England (BoE) slashed their base rate to a record low of only 0.1%. Due to this, many banks and building societies followed suit, reducing the interest rates on their savings accounts. According to data from Moneyfacts, as of 11 April, the highest rate of returns on an easy-access savings account was just 1%. While Cash ISAs may also offer a similarly low level of interest, unlike traditional savings accounts, they are a tax-efficient way to grow your wealth. This means that any interest you would earn on your savings isn’t subject to Income Tax, helping it to grow more effectively. If you want to make the most of this valuable benefit, you can contribute up to £20,000 into your ISA in the 2022/23 tax year. It’s also important to remember that this amount doesn’t roll over so if you don’t use it, you lose it.

High inflation erodes the buying power of your cash

While Cash ISAs may be a better way to save than with a normal savings account, due to their tax-efficient status, they still don’t offer a very high rate of interest. This can be a problem if the returns on your money are lower than the rate of inflation. In recent months, there has been a surge in the cost of living in the UK. According to figures from the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose to 7% in the year to March 2022. As we discuss in our other article, this can be a serious issue for savers as if your wealth doesn’t grow as fast as prices increase, your buying power is being steadily eroded. Even though you’re not technically losing money, your cash no longer buys as much as it used to. One of the main reasons why prolonged high inflation is a problem is that it can slow down your progress towards your financial goals. If you want to avoid this prospect, it can sometimes be a good idea to invest your money instead. This is because investments may see higher returns than cash, helping you to outpace the rate of inflation.

Investing your wealth can help you to protect your money from inflation

If you want to invest your money in an effective way, opening a Stocks and Shares ISA can be a great way to do this. Essentially, while a Cash ISA lets you hold your wealth in cash, a Stocks and Shares ISA enables you to invest your money in a tax-efficient way. One of the main benefits of investing your money in a Stocks and Shares ISA is that any growth you may earn is paid free from Capital Gains Tax (CGT). This can enable you to build your wealth more effectively and potentially see greater returns. According to research published in the Independent, between February 2021 and February 2022, Stocks and Shares ISAs grew at 13 times the rate of their cash counterparts. In the 2022/23 tax year, you can contribute up to £20,000 into your ISA, meaning you could see a large amount of tax-efficient growth. Of course, this limit is shared across all of the ISAs you hold, so it’s important to bear that in mind. For example, if you contributed £5,000 into your Cash ISA in a given tax year, you would only then be able to put £15,000 into a Stocks and Shares ISA. Of course, before you start investing it can be useful to know your tolerance to risk, as this can inform many of the decisions you make when building a portfolio. If you want to be able to invest in the most effective way, seeking expert advice can really benefit you. Working with a financial planner can help you to make informed decisions and enable you to build your wealth with greater confidence.

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If you want to know more about how to protect your money from the impact of inflation, we can help. Email us at or call 0330 320 5048.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers. Tax treatment varies according to individual circumstances and is subject to change. Stocks and Shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value. This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.