Gee and Watson

For many years, the interest rates payable under cash ISAs – and indeed all other bank and building society deposit accounts – have been pitifully low. Whilst inflation remained subdued, it could be said that holding money in a cash ISA was at least slightly better than keeping it in a box under the bed! However, the recent surge in the rate of inflation has changed the picture completely. 

Some economic commentators believe that the recent increase in inflation is merely a temporary ‘blip’, brought about by the economy ‘coming back to life’ after the debilitating effects of the various ‘lockdowns’. Others predict that inflation is likely to continue rising for some time as labour shortages and ‘supply chain’ problems become more serious. 

Whichever view proves to be more accurate, it cannot be denied that those who retain money in a cash ISA are currently suffering significant, negative returns, in real terms. The interest rates they are receiving are not keeping pace with inflation, resulting in the purchasing power of their capital being remorselessly eroded. 

From numerous conversations with ‘risk averse’ clients, we clearly understand the two main attractions of cash ISAs, namely that income tax is not payable on the interest generated and that the nominal value of any money invested will never reduce. However, with interest rates at such low rates, it almost goes without saying that the tax saved on ‘next to nothing’ is itself only a fraction of ‘next to nothing’. For example, a £10,000 deposit in a cash ISA, paying a typical interest rate of 0.46% per annum, would generate annual interest of £46, and secure a tax ‘saving’ of just £9.20, for a basic rate tax payer.  

Furthermore, that fact that a nominal sum invested in a cash ISA will never reduce ‘on paper’, should not blind investors to the very real erosion of the purchasing power of such deposits. 

Perhaps now is the time for cash ISA investors to consider a change of direction! 

The rules applicable to ISA transfers permit account holders easily to move invested money from a cash ISA to a stocks and shares ISA, and vice versa, as frequently as they wish. (The tax benefits applicable to an ISA are preserved however many such transfers are undertaken.) 

Therefore, in periods when the interest rates payable do not ‘match’ the inflation rate, investors can transfer money to a stocks and shares ISA, to seek the prospect of ‘real’, inflation-beating returns. Conversely, if interest rates were ever to return to the meaningful levels which pertained in the dim, distant past, money could be transferred back from a stocks and shares ISA to a cash ISA. 

It is not a requirement of a stocks and shares ISA that all the money held within it be invested in ‘risky’ shares. A stocks and shares ISA can hold a geographically diversified portfolio, comprised of funds investing in a range of different asset classes (shares, fixed interest bonds, cash, commercial property, gold and other commodities etc) and incorporating a degree of risk, on a scale of 1 to 10, with which an investor feels comfortable. 

There is no guarantee that any money invested in a stocks and shares ISA will not ‘dip below’ its initial value, and, of course, future returns cannot be guaranteed. However, it is possible to demonstrate that in most periods during the last ten years, the returns from multi-asset portfolios, incorporating relatively low degrees of risk, have been significantly higher than those generated by cash ISAs. In fairness, improving on the returns from cash ISAs has not been a particularly high hurdle to clear! 

If you would like to discuss the possible transfer of money from a cash ISA to a stocks and shares ISA, incorporating an acceptable degree of investment risk, please do not hesitate to contact your usual Gee and Watson adviser, or telephone us at either of our offices, i.e., Heswall (0151 342 6496) or Birkenhead (0151 647 6682). We should be pleased to consider whether such a transfer would be in your best interest and, more importantly, acceptable to you. The process is simplicity itself, usually involving nothing more than a couple of signatures.

Adrian Cleator Dip PFS

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