Amid political machinations at home and war in Ukraine, the cost of living crisis continues to dominate news headlines.
With inflation at 9.4% for the 12 months to June 2022, forecasts suggest it could peak at 11%. It isn’t expected to return to the Bank of England’s (BoE) target of 2% until 2024. A slowly rising base rate will do little to temper rising costs in the short term.
In the current economic climate, your cash savings are effectively losing value in real terms.
Could now be a good time to consider a risk-managed and goal-driven investment?
Read on to find out.
Low interest rates and high inflation spell trouble for Cash ISAs
Back in October 2021, you might have read our blog The risk of not taking enough risk in which we outlined cash’s inability to keep pace with inflation.
Since then, the situation has worsened.
The effective loss of real terms value in cash savings has seen 1.6 million savers ditch Cash ISAs in 2020/21. During the same period, Stocks and Shares ISA subscriptions increased by 860,000.
According to MoneyAge, the Cash ISA exodus saw an outflow of £7 billion in the second half of 2021 alone. These record outflows were matched by the lowest inflows on record for the preceding 12 months. The first half of 2021 saw just £2.5 billion flow into these accounts.
Cash ISAs are low risk and might be a good option for some
Which? confirms that both the number of Cash ISA subscriptions and the values saved both fell in 2020/21 compared to the previous year.
But that doesn’t mean that Cash ISAs don’t have their place.
For one, your money is protected under the Financial Services Compensation Scheme (FSCS). There are also tax advantages.
You don’t pay tax on the interest you earn, and your money is easily accessible, making a Cash ISA a good option for your emergency fund. With savings rates currently so low, however, you might want to look to a Regular Saver or a fixed-term option that could offer more competitive rates.
Alternatively, we can help you decide if a Stocks and Shares ISA is the right option for you.
3 reasons to choose a Stocks and Shares ISA
1. Stocks and Shares ISAs are tax-efficient
As with Cash ISAs, a Stocks and Shares ISA is tax-efficient. Any gains you make are free of both Income Tax and Capital Gains Tax (CGT).
You can invest up to the subscription limit each year, which applies across all the ISAs you hold.
For the 2022/23 tax year that limit, the “ISA Allowance”, stands at £20,000. This means that you can invest the whole £20,000 into your Stocks and Shares ISA each year, or split the amount between a Cash ISA or Lifetime ISA (LISA).
2. They are open to everyone and there is a junior version too
While you must be a UK resident, and over the age of 18, to open a Stocks and Shares ISA, junior equivalents exist too.
If you are looking to build a nest egg for a child, a Junior ISA (JISA) could be a great option. As with the adult ISA, JISAs are tax-efficient and available as both Cash, and Stocks and Shares versions.
The annual subscription for the 2022/23 tax year stands at £9,000 and contributions can be made by anyone, including parents, extended family, and friends.
3. They offer the chance for inflation-beating returns… with risk attached
Stocks and Shares ISAs invest in the stock market. This means that the value of your investment can fall as well as rise.
You must understand your attitude to risk and your capacity for loss. Investment is a long-term proposition so you’ll need to have a long-term goal in mind too.
Understand these factors, and you could see your money achieve returns far above the interest you receive on the cash funds you hold.
In fact, the Independent confirmed in February that Stocks and Shares ISAs returned an average of 6.92% between February 2021 and February 2022. This is more than 13 times the average return on a Cash ISA (0.51%) during the same period.
It’s also well above the BoE’s 2% inflation target. This means that as inflation peaks and then begins to fall, you could soon see your investment making inflation-beating returns.
Get in touch
If rising inflation and the cost of living crisis have left you worried about the real terms value of your cash savings, now might be the time to consider investing.
Always a long-term proposition, you should only invest with a goal in mind, and with full knowledge of your risk profile. If you’d like to discuss a Stocks and Shares ISA, or any other aspect of your financial plans, contact us now to find out how our Chartered financial planners could help you.
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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
