Individual Savings Accounts (ISAs) are a favoured method of storing wealth in the UK, as they’re known for their tax efficiency when it comes to saving and investing.

Among the various forms of ISA, one in particular – the Cash ISA – has emerged as a popular choice for many, as it allows you to contribute savings up to the £20,000 ISA allowance (as of the 2023/24 tax year) and accrue interest without incurring Income Tax.

Contribution figures highlight their popularity, as Money Marketing reveals that Cash ISAs have seen the largest inflows from the start of the tax year since their launch in 1999. In fact, savers contributed more than £9 billion to the tax-efficient accounts in the first three months of the 2023/24 tax year alone.

However, it’s important to note that, despite their popularity, rates on savings have still been lagging behind inflation somewhat, meaning a Cash ISA may not necessarily be the best home for your wealth.

Continue reading to discover why you may want to think twice before holding too much of your wealth in a Cash ISA, and why a Stocks and Shares ISA may be a welcome alternative.

1. Your savings could still struggle to keep pace with inflation

The Bank of England (BoE) has been increasing the base rate to control rising costs in response to high inflation. Indeed, the Office for National Statistics reveals that the Consumer Prices Index (CPI) rose by 6.7% in the 12 months leading to September 2023, the same as it was in August 2023.

In turn, the BoE has increased the base rate, currently standing at 5.25% as of the end of October 2023. This is significantly higher than it has been over the past 18 months, having rested at just 1.75% in August 2022.

As a result, savings rates offered by Cash ISAs have climbed in accordance – Paragon Bank reveals that one-year fixed-rate Cash ISAs increased from 1.85% in August 2022 to 5.21% 12 months later.

Now, as of 18 October 2023, Moneyfacts shows that the best rate offered by a one-year fixed-rate Cash ISA is 5.85%.

However, even though savings rates offered by Cash ISAs have risen considerably over the past year, it’s important to note that they’re still lagging behind the 6.7% CPI rate as of October 2023.

This means that if you save too much of your wealth in a Cash ISA, it may not keep pace with inflation, and its purchasing power could be eroded in real terms.

For instance, the BoE inflation calculator shows that £1,000 worth of goods and services in 2022 would “cost” £1,079 today. Meanwhile, based on the best one-year fixed Cash ISA rate of 5.85%, saving £1,000 a year ago would be worth £1,058.50 today.

As you can see, the spending power of your savings would have diminished in the last 12 months if you’d simply saved it in a Cash ISA.

2. You use up your ISA allowance when you save in a Cash ISA

It’s also worth noting that by saving money in a Cash ISA, you’re using up your ISA allowance. As previously mentioned, this allowance stands at £20,000 in the 2023/24 tax year.

Crucially, though, this allowance covers all your ISAs. This means that if you save £10,000 in your Cash ISA, you can only contribute another £10,000 in your Stocks and Shares ISA in the same tax year.

As such, it may be unwise to use up your allowance on your Cash ISA, as it means you won’t be able to deposit as much in your other forms of ISAs. That might be your Stocks and Shares ISA, or may be an Innovative Finance or Lifetime ISA (if applicable).

Moreover, the government has frozen the ISA allowance at £20,000 since 2017, and it hasn’t risen in line with inflation since this point.

This is Money reveals that if the £20,000 tax-free allowance had risen yearly in line with the CPI since 2017, it would stand at roughly £26,000 today. This essentially means that the ISA allowance has become a “stealth tax”.

This is a levy that isn’t immediately recognised as a tax rise, but ultimately has the same effect, because you can end up paying more tax on your wealth, even though tax rates themselves haven’t changed.

This further shows that Cash ISAs may currently be an unappealing place for your wealth unless the government decides to increase the ISA allowance in the future, as if the ISA allowance isn’t rising, you’re almost wasting more of it on cash.

3. A Stocks and Shares ISA may be a better home for your wealth

Rather than using up your allowance by contributing to a Cash ISA, it may be wise to invest through a Stocks and Shares ISA instead.

Any investment gains made in a Stocks and Shares ISA are free from Income Tax and Capital Gains Tax (CGT). What’s more, you could actually give your wealth the opportunity to outpace inflation.

To demonstrate this, Barclays examined what £10,000 would be worth had it been held in cash versus various investments between March 2018 and February 2023. The findings revealed that £10,000 held as savings during this five-year period would be worth £10,068, while it would be worth £12,754 if held in shares.

For reference, the BoE inflation calculator shows that £10,000 in 2018 would be worth £12,074 in February 2023. That means investing during the above five-year period would have helped your wealth outpace inflation.

It’s important to note that investments in your Stocks and Shares ISA typically need to be a long-term holding to give yourself the best chance of positive returns. So, if you think you’ll need to access your wealth within the next five years, a Stocks and Shares ISA may not be the correct choice for you.

Bear in mind that it’s important to consider your appetite for risk, as the value of your investments could fall as well as rise.

Get in touch

If you’re unsure how you should hold your wealth right now, then we can help at Cordiner Wealth.

Email or call 0113 262 1242 to speak us today.

Please note

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.