Independent Wealth Management

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The problem with Cash ISAs

If you’ve got a cash ISA, you will already know that the interest rates are incredibly low and that your returns are negligible.

Cash ISAs were a great innovation. They followed on from the highly successful TESSAs (Tax exempt special savings accounts). These products encouraged many people to start saving by offering good levels of tax free interest. I regularly meet people that have significant portfolios of cash ISAs. These plans are traditionally very good for people who want to accumulate savings, but do not want the risks associated with investing. In the days of higher interest rates, tax exemption was a significant benefit. However, with the current low interest rates, tax efficiency provides little value.

Here is where the dilemma lies. By sticking with your ‘low risk’ cash ISAs, you are completely exposing yourself to the risk of the loss of spending power created by the effects of inflation. In fact this is not so much a risk, but more of a certainty! The very thing this product is meant to avoid has become a certainty due to low interest rates during an inflationary economy.

This then, is the problem with cash ISAs and I find myself having regular discussions about this issue with many people.

So, what is the answer?

Well, there is no absolute answer, but there are always options. The most obvious one being to transfer some or all of your cash ISA portfolio into stocks and shares ISAs. You might consider that this is not for you, in which case you will remain with the certainty of seeing your capital eroded.

But perhaps you need to recognise that the only way your capital will have the potential for growth, over and above inflation is to consider a stocks and shares ISA. With capital growth, the tax efficiency of ISAs becomes a very important feature as you don’t want to be paying tax on your gains.  There are thousands of funds to choose from, investing in many different ways. We can help you to select funds that suit your attitude to risk, even if you are cautious. You should recognise that this is not something you should do over a short term. To be more certain of a healthy return you need to invest over a reasonable term – generally at least 5 years. We can help you to structure a portfolio of funds that will provide the potential for growth, income or both. You must recognise that with any investment there is the risk of loss, so this isn’t for everyone. But with the risk of loss comes the possibility of recovery and growth. Investing in stocks and shares can be regarded as a bit of a rollercoaster as your investment value bumps up and down. However, many people have benefitted greatly by taking some investment risk and making wise decisions about how much of their capital they should invest and how their capital should be invested. We can help you through this process, but ultimately the decision is yours.

Please note:

This article is intended for guidance only and is not advice.

Remember, it is important that you seek a personal recommendation before choosing a plan that is suitable for your needs.

Investment returns may go down as well as up.

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I have known Barry and used his financial services for many years for various aspects of our family’s needs. He has always provided a first class independent and personal service, giving un-biased advice that is in our best interest. He operates his business in a very professional way and communicates all the information efficiently and speedily.

David Hey

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