Cash ISAs are strange. They are supposed to encourage long term saving but are used as a tax-shelter for higher rate tax-payers who have large amounts they do not want to invest – for the long-term.
The Chancellor is now planning ways for those wealthy people to switch from saving (in cash) to investing (in shares). The FT reports as much
The levers that the Chancellor can use are primarily around allowances. The most radical idea the FT claims to be under consideration is the creation of a new ISA (akin to the old single company PEP) that would offer tax-breaks to people investing in UK companies using the UK stock exchange. This angers free marketeers who fear that people’s wealth would be compromised by the promotion of “home bias”.
But this argument is about ISA investors already investing in shares. Most ISA savers invest in cash. Currently you can get what looks a healthy return for doing so (numbers from Money Saving Expert)
Putting money in a Cash ISA may sound a great way of getting a tax-free return until you take a step back. The return you are getting is not a “real-return”, it is not keeping up with inflation , even at these higher rates.
Secondly, the rates you get from a Cash ISA tend to be lower than you get from the open market and if you can get open market returns “tax-free”, Cash ISAs are just a lot of tax-fuss about less than nothing.
In practice, few of us hold enough money in cash deposits to make Cash ISAs work, they work best for the providers of Cash ISAs who can make more money from this product than from running a simple deposit account.
This is because almost all of us (apart from those paying 45% tax) get a personal savings allowance
that means that we can save meaningful amounts in a bank account and not have to pay tax on it.
When interest rates were impossibly low, then the PSA was impossibly high, right now the PSA is low but even today a basic rate tax payer has to have over £20,000 in cash and a 40% taxpayer, half that, to pay tax on non-ISA cash. So for most of us, Cash ISAs are an expensive waste of time. Cash is not a good long-term home for money, a Cash ISA that encourages long-term saving in cash is not a good way to invest and it really doesn’t make sense for the Government to incentivise that kind of saving.
Saving into shares is a good long term investment
- Investing the full Personal Equity Plan (PEP) and ISA allowance since PEPs were launched in 1987, followed by ISAs in 1999, would have delivered an almost fourfold return of £1.37 million
- When you factor in interest compounded over the period, equities still return over twice as much as cash
Investing in shares is good for your finances, even if they don’t provide the security of a gradually rising bank balance.
Of course many of us would rather not invest in something that goes down as well as up, so shares (and bonds) are bad news for the nervous person’s heart rate. But then so’s looking in the window of your estate agent when house prices are going down!
So I support people getting out of Cash Isas when they do nothing but lose people money and I support people getting into shares – and buying shares within an ISA to avoid tax.
I also want to support the British economy, when it makes sense to do so. So if the Chancellor can help me to help myself and UK companies, I will consider moving savings into UK shares (equities).
That seems totally logical. My savings should supports investment into companies which pay tax in the UK and provide the growth in the economy to pay future pensions , healthcare and education. Using tax grants for that is fine by me.
Rather than putting money in Cash ISAs, we should put money in Share ISAs. Share ISAs that invest in companies that support our welfare, are fine by me.