ISA or savings account, which is best for you?
Trying to figure out where to keep your savings? You may be hesitating between opening an Individual Savings Account (ISA) or a standard savings account. There are many different options out there for you to consider before deciding which is best for you.
Which all raises a very pertinent question: What is the one thing you really do not want now that inflation is rearing its ugly head again? Answer: A purely cash ISA.
Inflation is back for the near future, and the value of money is falling. In addition, it is falling faster than the super-low interest rates most cash ISAs offer.
This means you are losing money on any tax-free cash savings you have.
What is £6.6bn? The latest ISA saving statistics show the market value of ISA funds at £620bn. Cash accounts for 51% or £316.2bn of this. With CPI at 2.1% to May 2021, this means that the impact of inflation on those cash holdings is to reduce their real value by £6.6bn. The question is how much of this erosion would be offset by interest.
At the moment, it is estimated there is about £316.2 billion squirrelled away in tax-free savings. Moreover, in 2019-2020 cash ISA savings hit a four-year high.
The average tax-free savings rates on cash ISAs in 2020-21 were 0.4%, but inflation was 0.65%, and is now at fluctuating around an average of 1.5%.
Therefore, although that £316.2 billion earned £1.46 billion gross interest, inflation wiped £540 million off its value.
How many millionaires do you know who have become wealthy by investing in savings accounts?
Money has been pouring into savings accounts since lockdown has reduced the ability of consumers to spend.
This is despite the rates of return on savings continuing to fall. The average easy access interest rate hit another new low of 0.18% in January.
The average no-notice Cash ISA rate is now just 0.25%.
Things to consider:
• If your Cash ISA savings are not keeping up with inflation, then your future spending power is reducing.
• Do you know what rate of return you are getting on your savings?
• Could you be getting better returns for your hard-earned cash?
Yet it is not just cash savings that need to be regularly reviewed you need to check on your complete savings portfolio to ensure you are getting maximum ROI.
The best chance of maximising the tax benefits of ISAs is to invest in assets with the potential of generating long-term income and capital growth. That means a Stocks & Shares ISA.
Is it time to review whether it’s appropriate to take more, or less, risk with the money you’ve got invested?
Should you consider looking for better returns for cash savings? I think it is long overdue in these strange times. If you are to choose one of the ISA combinations, as listed above, to be used as long as your total tax-free ISA savings do not exceed £20,000 in any single tax year.
You MUST save or invest by the end of the tax year, 5th April, to see the benefits. If you do not use your full £20,000 allowance, it does NOT roll over – so you will get your new allowance for the next tax year, but you will not be able to add anything extra to make up.
Finally if in any doubt, please seek advice from an expert in these financially volatile and uncertain times!