Cash still king for Isa savers but more turning to stocks and shares

Cash was king for Isa savers during the pandemic savings boom – but its popularity appeared to be waning as people increasingly turned to stocks and shares.

Around 12 million adult Isa accounts were subscribed to in 2020/2021, down from 13 million in 2019/2020, HM Revenue and Customs (HMRC) said.

But the share of accounts subscribed to in cash fell to two-thirds (66%) of accounts, HMRC said, compared with three-quarters (75%) in 2019/2020.

Around £72 billion was subscribed to adult Isas in 2020/2021 – a decrease of £2.4 billion compared with 2019/2020.

This decrease was driven by the fall in cash Isa subscriptions, HMRC said, which dropped by around £12 billion.

The amounts subscribed to stocks and shares Isas increased by around £10 billion compared with 2019/2020.

Adrian Lowery, financial analyst at investment platform Bestinvest, said the figures suggest that “during the pandemic savings boom, many households looked towards investments rather than cash savings, with the Bank of England having slashed interest rates to an all-time low of 0.10% in March 2020”.

He continued: “After the initial shock of the Covid crash that hit the stock markets from February to April 2020, it seems that savers gathered their nerves.

“Typically, stock markets rebound from sudden crises, and a crash in those sorts of circumstances can sometimes be a good time to enter the market.

“There was also doubtless a momentum effect as markets, and particularly certain sectors like tech, healthcare and green projects, then proceeded to soar for the following 18 months, buoyed by vast stimulus programmes from government and central banks.

“In general though, it is risky for investors to try to time the market, and rather it is better practice to buy into investments at regular monthly intervals.

“This gives you the best chance of riding out volatility, which global markets continue to suffer from given a whole new set of concerns.”

Mr Lowery said the “waning popularity of cash Isas” is not surprising when considering the personal savings allowance means the majority of savers can earn up to £1,000 of interest tax-free per year from regular savings account without the need to open a cash Isa.

He added: “While it is wise to hold some cash savings for emergencies, with inflation now rampant it is unwise to hold too much in cash for long periods of time.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “Unfortunately, some of the fall in cash Isas will be because of the toll the pandemic took on many people’s incomes.

“We know that the higher your income, the more likely you are to open a stocks and shares Isa rather than a cash Isa.

“During the first year of the pandemic, those on higher incomes were more likely to have kept their income and seen their outgoings drop – so they had more money to invest.

“Meanwhile, those on lower incomes were more likely to have lost some of their wages and still faced the same outgoings – so they had nothing spare for saving.”

Alistair McQueen, head of savings and retirement at Aviva, said: “For many, the cash Isa has had its day.

“The rising cost of living will challenge everyone’s household finances.

“For those who are able to save, the need to shop around for the best deal is more important than ever. The Bank of England reports that more than £250 billion continues to sit in instant access accounts, paying no interest. For many of these savers, there are better returns to be had.”