At one time, ISAs were the darling of the savings market, yet over the last few years they've begun to lose their shine. This has arguably been driven by the Personal Savings Allowance (PSA), which allows up to £1,000 in interest to be earned tax-free each year, with fewer savers seeing the value of ISAs as a result – and new figures highlight just how rapidly these formerly-loved accounts are going out of fashion.
Official figures from HMRC show that there was a sharp fall in the number of subscriptions in the last financial year, with around 11.1 million adult ISAs subscribed to in 2016-17, down from 12.7 million in 2015-16. This was wholly driven by a fall in the number of active cash ISAs, which fell by 1.6 million, showing a clear drop in the popularity of these accounts.
At the same time, the amount invested in ISAs saw a similar downturn: around £62 billion was subscribed to adult ISAs in 2016-17, down £18 billion compared to 2015-16. This was again driven by the fall in cash, which saw subscriptions fall from £58.7 billion to £39.2 billion over the same period. Average subscriptions in 2016-17 stood at £5,558, a 13% decrease on the 2015-16 figure, further highlighting the lack of desire to save into these accounts.
The blame for the declining popularity of cash ISAs can be firmly placed on the Personal Savings Allowance, as the ability to earn up to £1,000 in interest tax-free means there's no need to worry about where your money is saved. Indeed, at first glance, only the very wealthy will still need to consider ISAs if they want to keep their cash away from the taxman, so it's little wonder that fewer people think saving into an ISA is worth it.
This has had a knock-on effect on ISA rates, with our own figures confirming that averages have plummeted since the PSA came into effect; the average long-term ISA rate, for example, stood at just 1.25% in August, down from 1.69% in March 2016 and 1.87% in February of the same year, just before the PSA was launched.
This leads to a downward spiral, with lower interest rates meaning people are even less likely to invest, fuelling the continued downturn of the sector.
However, the declining popularity of cash ISAs, together with poor savings rates, has led to an interesting pattern emerging – cash ISA popularity may be plummeting, but stocks & shares are ramping up.
HMRC figures showed that the amount of money subscribed to stocks & shares ISAs reached a record high of £22.3 billion in 2016-17, up from £21.1 billion in 2015-16, with the number of people subscribing to such deals rising from 2,539,000 to 2,589,000 over the same period. This reverses the general trend seen in recent years and suggests that, as people turn away from cash, more are becoming open to the idea of investing, with the potential returns available being too good an opportunity to pass up.
"This reflects the fact that the stock market has produced better long-term returns than cash," commented Danny Cox, chartered financial planner at Hargreaves Lansdown. "ISAs are the saver and investor's friend and should be at the heart of every portfolio. Record subscriptions to stocks & shares ISAs are a reflection of interest rates being at such a low ebb and the stock market being pretty much the only game in town if you want an income from your savings."
This just shows that you may not want to disregard ISAs altogether, particularly if you've got a higher risk appetite. Even completely turning away from cash ISAs may prove to be short-sighted, said Danny, as although low interest rates and the PSA look set to remain in place for a while longer, "neither are necessarily a permanent fixture of the financial landscape".
It just means that you'll need to work a little harder to find the best cash ISA rates, and you may want to consider stocks & shares ISAs for the potential to get even greater returns on your money. Find out more about this method of investing here, and see if it's time to take the plunge.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.