- Cash ISA subscriptions are down 40% from their August 2023 peak, according to Bank of England data
- This is on the back of a strong year for inflows so far this tax year
- OBR predicts cash accounts will produce an average return of 2.7% per annum over the next five years
- Over one million people have over £50,000 in Cash ISAs when financial planning suggests holding three to six months expenditure in cash
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“There are tentative signs the cash party might be winding down, after a year in which higher interest rates have drawn in large crowds. Cash ISA subscriptions fell to £2.9 billion in January from a recent high of £4.9 billion in August 2023, according to Bank of England data (these figures are seasonally adjusted to make them comparable across different months of the year). Inflows are still up year on year by 74%, but in the last couple of months, they appear to have dropped to a lower level (see chart below). This latest data clearly only covers the very beginning of the ISA season, and so the jury is still out on whether the trend will continue in the busy months of February, March, and April.
Source: Bank of England, seasonally adjusted
“There are probably a number of factors behind the slowdown. While interest rates are still relatively high compared to two years ago, they have been dropping back of late. The average variable rate ISA is now offering 2.4% interest, down from a high of 3.4% in October, while the typical one year fixed rate ISA is now offering 4.5%, down from a high of 5.5% in October, according to Bank of England data. These are average rates and below the best rates available on the market, which highlights the importance of shopping around when it comes to picking a Cash ISA.
“Savers also know that rate cuts are on the cards this year, with markets currently expecting base rate to be 0.75% lower by the end of this year, and to fall further from there. Indeed, the OBR expects base rate to average around 3.5% over the next five years. They forecast the five year return from the average deposit account to be lower, at 2.7%. Some savers may now be more circumspect about putting money into cash in a declining interest rate environment. As interest rates diminish, we may see money moving out of cash and into the equity markets, which could put upward pressure on stock prices.
“Inflation might be cooling but household finances are still under pressure, especially as many homeowners have rolled off cheaper mortgage deals and are now paying much more to keep a roof over their head. That may also be constraining the amount of money consumers have to throw at Cash ISAs, especially at the back end of winter when energy usage has been high. Furthermore cash may be tied up in fixed rate accounts after a feeding frenzy in the summer of last year, which has now dissipated. Some savers might find themselves waiting for the timer to tick down on their fixed term accounts before having the funds available to recycle into a Cash ISA.”
How much cash is too much?
“There were already concerns that many savers were holding too much cash prior to the savings glut. In 2021 the FCA identified 8.6 million consumers holding more than £10,000 of investible assets in cash, and set a target to reduce this number by 20% by 2025.
“4.6 million people hold more than £10,000 in a Cash ISA, according to HMRC statistics. 1.1 million hold more than £50,000 in Cash ISAs. These figures pre-date the big rise in interest rates, and don’t include cash held in current accounts, savings accounts and NS&I products like Premium Bonds. So the overall cash position of these savers is likely to be significantly bigger. Cash is meant to be held as a rainy day fund, but some consumers seem to be prepping for a biblical flood.
“Given the major economic shocks we have endured over the last decade, and the sea change in interest rates, it’s understandable that some people are sitting on a large cash pile. But typical financial planning advice is to keep three to six months expenditure in cash. On a £50,000 cash holding that would imply monthly spending of £8,333 for six months, or around £2,000 a week. The latest data from the ONS puts average weekly household expenditure at £529, and even the richest fifth of households were only spending £811 a week.
“The government is keen to encourage retail investors to back the flagging UK stock market using a UK ISA. The weak relative performance of the UK stock market is one barrier to this endeavour, but so is the predilection of UK savers to hold large sums of cash. In 2021 the FCA set out to significantly reduce the number of people holding high levels of cash, but the big shift in interest rates has made that task an uphill battle.”
