Cash ISA savings see £20 billion collapse

The number of accounts opened fell by 1.6 million, from 10.1 million last year to 8.5 million in 2016/17.

When the limit on ISA contributions was increased in 2014/15, an extra £20 billion per year began to flow into cash ISAs, and the higher level of inflows continued in 2015/16.

The collapse in 2016/17 could reflect continued low interest rates meaning that cash ISAs almost invariably deliver negative real returns.

It could also reflect the introduction in April 2016 of the Personal Savings Allowance which allows basic rate taxpayers to receive £1,000 of cash interest tax-free each year (£500 for higher rate taxpayers and £0 for additional rate taxpayers).

Meanwhile, the amount of money subscribed to stocks and shares ISAs reached a record high last tax year, of £22.3 billion, up from £21.1 billion in 2015/16. The number of people subscribing to stock and shares ISAs also increased to 2,589,000, from 2,539,000, reversing the trend of falling subscribers in the last few years.

The amount of money held in adult stocks and shares ISAs now stands at £315 billion compared to £270 billion in cash ISAs. This reflects the fact that the stock market has produced better long term returns than cash, and also that people investing in stocks and shares ISAs tend to hold them for longer.

Danny Cox, Chartered Financial Planner at Hargreaves Lansdown, said: "Low interest rates and the new personal savings allowance have precipitated a collapse in cash ISA saving. While understandable, this may prove to be short-sighted as neither low interest rates nor the personal saving allowance are necessarily a permanent fixture of the financial landscape, though it’s fair to say both do look set to remain in place for the foreseeable future.

"Stocks and shares ISAs by comparison have enjoyed their biggest year ever in terms of the amount of money subscribed, despite Brexit causing a dip in an otherwise buoyant stock market. In a positive development the number of stocks and shares ISA investors also increased, reversing the trend of recent years and suggesting that more people are now turning to the stock market with their long term savings."

Steve Webb, Director of Policy at Royal London, added: “These latest figures show that the shine has really come off cash ISAs. Whilst keeping a small amount of money in cash for emergencies or a rainy day makes good sense, holding large amounts of money in a cash ISA for the long-term can seriously damage your wealth. Low ISA interest rates coupled with rising inflation means that cash ISAs have delivered negative real returns year after year. It is to be hoped that this slump in saving through cash ISAs means that investors have started to realise the risks associated with keeping their money in cash.”