Responding to reports that the Treasury may halve the annual cash ISA allowance to £10,000 in the forthcoming Autumn Budget, Claire Trott, Head of Advice at St. James’s Place, notes that while such a change may initially concern savers, it could ultimately serve as a catalyst for greater investment engagement and improved protection against inflation.
Claire Trott, Head of Advice at St. James’s Place, says:
“While the speculated overhaul of the ISA regime and reduction of the Cash ISA limit to £10,000 may be causing unease for many savers, it could prove beneficial in the long term, encouraging individuals to invest their money instead.
“The UK population has long been over-saved and under-invested, and while a cash buffer is important –promising safe, guaranteed returns – individuals who chose a cash ISA over a stocks and shares ISA could be missing out on hundreds of thousands of pounds over the long term.
“For individuals saving for long-term goals, the cash ISA approach can be risky. As shown by our analysis1, inflation can quickly and substantially erode the real value of cash savings. Ultimately, those wanting to reap the rewards of their finances over the long term need to be invested in the market. While short term fluctuations and market volatility may deter risk averse savers, history shows that staying invested over time has consistently offered far greater potential for growth, and protected wealth against inflation. For those nervous about investing without guidance, speaking to a financial adviser can be a great way to get started, and can provide confidence you’re making the best decisions over the long term.”
SJP analysis highlights how saving into a stocks and shares ISA can deliver significantly stronger long-term returns than leaving money in cash
SJP’s analysis demonstrates that someone who invested the maximum ISA allowance annually into a stocks and shares ISA tracking the MSCI World Index since 2015/16 (a total of £190,500) could have built up a total pot of £364,2001, benefitting from returns of £173,700 over the period. By contrast, placing the same contributions into a cash ISA tracking the Bank of England base rate would have grown to £217,300 – almost £147,000 less.
SJP’s analysis also illustrates the benefit of investing when it comes to beating inflation. Just to keep pace with inflation over the period, the value of the ISA at the end of ten years would need to have grown to nearly £236,400 – over £19,000 more than the cash ISA achieved, yet nearly £128,000 less than the stocks and shares ISA delivered.
