- Savers put £3.4 billion into Cash ISAs in June, according to Bank of England data released today
- This compares with average June inflows of £0.7 billion in the previous ten years
- High taxes and interest rates explain the Cash ISA glut
- Savers might be hoarding too much cash
Laith Khalaf, head of investment analysis at AJ Bell, says:
“The Cash ISA glut has some legs left in it yet, as savers ploughed a further £3.4 billion into these tax shelters in June, according to the latest figures released by the Bank of England. This compares to average June inflows of £0.7 billion in the previous ten years. Until recently that size of inflow would have been more associated with the end of the tax year deadline when everyone rushes to make the most of their ISA allowances at the last minute.
“Savers are clearly ploughing more money into ISAs because of attractive interest rates and high taxes. For many years Cash ISAs lay dormant because of a combination of super low interest rates and the Personal Savings Allowance, which meant tax wasn’t a pressing issue when it came to cash savings. That’s all changed now interest rates have risen, and people are getting bumped up into higher tax bands because of frozen thresholds.
“The interest rate cycle looks to be near its peak, with central banks starting to loosen policy again. This week the Bank of England is due to rule on whether to cut rates, a decision which rests on a knife edge. Although rates can probably be expected to fall in the coming months, they will still remain elevated when set against the long period of ultra-loose monetary policy before the Bank started hiking in 2021, and so reasonable levels of savings are therefore likely to require evasive action to avoid an unnecessary tax bill. We’ve seen this sort of behaviour spilling over into the government bond market too, with some investors buying short-dated, low coupon gilts to try to reduce their tax liabilities.
“For many people saving into a Cash ISA is prudent financial planning, but there is a question mark over whether some may be hoarding too much cash, and not taking on investment risk in search of better long term returns. Figures from HMRC show that 3 million people have more than £20,000 held in a Cash ISA, but haven’t put a dime into a Stocks and Shares ISA. Meanwhile the FCA is on a mission to get more people investing rather than holding cash. It appears the regulator may be swimming upstream on this one though. Since 2021 the number of people holding more than £10,000 in investible assets wholly or mainly in cash has risen from 8.4 million to 11.8 million (source: FCA, Consumer Investments Strategy update).
“The new Labour government is keen to stoke investment in UK shares, but it might first want to give some thought to how to foster a culture of investing in shares, period.”
