Article

Could your cash ISAs be working harder?

Many investors do not realise it is possible to easily switch from a Cash ISA to a Stocks and Shares ISA.

| 3 min read

Low interest rates are hurting savers. The Bank of England base rate was cut to an all-time low of 0.1% last year in response to the Covid-19 outbreak, and while it has helped some businesses stay afloat, savers have lost out. The best bank and building society accounts pay little more than 1%. Many pay nothing at all.

Nevertheless, according to the Bank of England, over £290bn is invested in cash ISAs in the UK. The cash ISA has been a very popular product for years, providing the ability to hide a chunk of savings away from the tax man every year. The money invested in cash ISAs remains tax-free – but these days, it is pretty much return-free too. It begs the question – could cash tucked away in savings accounts and Cash ISAs be working harder?

The answer is almost certainly yes, but only for those happy to take some risk. As I pointed out in my previous article, "Is cash really king?" the spending power of cash tends to go backwards over time – and there’s reason believe the erosion of its value will quicken over the next few years. Other assets – such as company shares – don’t offer the security of capital and you could get back less than you invest. Yet over long periods leaving too much in cash could be more toxic to your wealth than taking risks with investments. A well-managed and diversified portfolio gives you the prospect of decent long-term returns that can drive your wealth forwards rather than backwards.

ISA opportunity

Many investors do not realise it is possible to switch from a Cash ISA to a Stocks and Shares ISA without losing the valuable tax-free status of their savings – simply by completing a transfer request. It’s possible to switch back again if you need to.

For some, Cash ISAs are somewhat redundant anyway. The personal savings allowance introduced from April 2016 means that many people no longer pay tax on their savings interest on ordinary bank and building society accounts.

This removed the automatic deduction of 20% from savings income and allows a basic rate taxpayer to earn up to £1,000 in savings income tax-free. Meanwhile, higher rate taxpayers can now earn up to £500 tax free and there is no allowance for Additional Rate payers. With ordinary savings accounts providing similar rates in many cases, and banks now paying interest gross rather than net, is there any point in saving into a Cash ISA? Tax-efficient allowances are generally best used for assets that produce a high level of return anyway, either as income or as a capital gain.

Flexibility

The possibility of transferring from a Cash ISA to a Stocks & Shares ISA (and vice-versa) is a valuable flexibility not to be overlooked. The stock market offers a greater opportunity to grow your money and has historically performed better than cash over the long term. If you have not invested before you can use Cash ISAs (or a portion of it) to get started and build the foundations of an investment portfolio. If you are already an investor you can use it to add to your portfolio.

New to investing? Find out how you can start your investment journey, with our help and guidance.

It is straightforward to transfer your Cash ISA to a Stocks & Shares ISA such as the Charles Stanley Direct ISA, where you can invest in a wide range of funds and shares. Although you should check you won’t incur excessive exit penalties from your existing provider before doing so.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Could your cash ISAs be working harder?

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The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

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