ISA investors at risk of missing out on longer-term growth

interactive investor comments on latest HMRC ISA statistics

HMRC has today unveiled its latest statistics on ISAs, Child Trust Funds, and Help to Save accounts.

Commenting, Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “Nearly two million people became tax-free savers and investors between 2019 and 2020, which is a positive trend, boosting the nation’s financial security and resilience.

“The increase in both the number of ISAs held and the amounts going in came mostly before the first lockdown, so do not capture the impact on savings and investment balances of the inability to spend as much during the pandemic. It shows that people were already forming positive savings habits even before they were ‘saving by default’ due to lockdowns.

“Despite low interest rates on cash ISAs that barely beat inflation, cash ISAs remained the most popular choice. It’s possible that savers are missing out on higher growth by opting for the feeling of greater security that comes with a cash account, rather than choosing a stocks and shares ISA.

“Stocks and shares ISAs offer the opportunity of longer-term growth that is more likely to beat inflation, so for balances that will not need to be tapped for more than five years, can present a better option.

“The worry is that some of the balances sat in low-rate cash accounts are actually losing value, in real terms, over time.”

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The figures show that cash ISAs remain a firm favourite among British savers. Despite the low rates on offer, four times as many people opened or contributed to a cash ISA in the 2019-20 tax year than to the stocks and shares equivalent on from the previous tax year (1.2 million versus 300,000).

“However, while the coronavirus crisis highlighted the importance of having cash savings for a rainy day, long-term savers should take care not to keep more than they need in low interest accounts because it can be eroded by inflation.

“Rock-bottom savings rates also provide the impetus to invest. Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows while benefiting from the long-term potential that comes with this approach.”

Junior ISAs

Myron Jobson says: “The Junior ISA allowance stands at a generous £9,000 for each tax year but, in reality, few are fortunate enough to maximise the allowance, with the average parent saving £1,180 - which is surprisingly down from £1,465 the year before. But even modest sums invested in a stocks and shares Junior ISA can produce returns that far outstrip the interest rates offered by cash savings over the long term – although along with the potential for greater returns, comes the potential for losses.

“It is difficult enough investing for yourself, so the prospect of investing for your children and the possibility it may go wrong is a challenge for even the most experienced investor - which may explain why so many parents still choose to save their Junior ISA in cash. However, history shows that even a ‘middle of the pack’ fund is likely to compare favourably with cash over 18 years. So, you don’t need to be an expert stock picker to benefit.

“We have tried to help beginner investors with our Quick Start Fundscovering a range of risk profiles and with passive, active and ethical options.”

interactive investor recommends six carefully selected Quick Start Funds for beginner investors:

ACTIVE/SUSTAINABLE

• BMO Sustainable Universal MAP Cautious. The lowest risk of the three BMO funds. It targetsan annualised return of 2% above inflation over five years and can hold as little as 20% and as much as 60% in equities.
• BMO Sustainable Universal MAP Balanced. The medium-risk option.The fund targets an annualised return of 3% above inflation over five years.  The fund can hold as little as 30% and as much as 70% in equities.
• BMO Sustainable Universal MAP Growth. The most adventurous, higher risk of the three but with potential for higher gains. The fund targets an annualised return of 4% above inflation over five years and can hold as little as 40% and as much as 80% in equities.
• Bear in mind that each target for the funds is just a target and not guaranteed.

PASSIVE

• Vanguard LifeStrategy 20% Equity - for shorter-term goals (3-5 years)
• Vanguard LifeStrategy 60% Equity (for 5+ years)
• Vanguard LifeStrategy 80% Equity (for 5-10 years)