Recent figures published by FTAdviser suggest that more than 3 million pensioners hold all of their ISA investments in cash.

Cash and Stocks and Shares ISAs are tax-efficient but investing has inherent risks and rising inflation can lower the real-terms value of cash savings.

Keep reading for your ISA guide.

Rising inflation can lower the real-terms value of your cash holdings

During the 2018/19 tax year, the last year for which figures are available, 5.8 million over-65s held an ISA, with a total value of more than £300 billion. FTAdviser confirms that £87 billion of those holdings was in cash.

On 17 March, the BoE used its announcement of a rise in their base rate to confirm that inflation is set to rise well above their previous forecasts.

Currently at 5.5% – already exceeding their 2% target – the Bank confirmed that inflation could reach 10% as we head into spring 2022. The BoE expect the figure to drop closer to their target amount during 2024.

While the base rate rise announcement was welcome news for savers, it remains highly likely that your savings account interest rate will be below the current rate of inflation. When this is the case, the buying power of your cash drops and your money is effectively losing value in real terms.

With inflation already high, and rising, this could become an issue for funds held in Cash ISAs.

The pros and cons of a Cash ISA

Pros

A Cash ISA works in a similar way to the savings account you hold, and your money is protected by the same Financial Services Compensation Scheme (FSCS).

You don’t pay tax on the interest you earn, making an ISA particularly attractive if you have a large amount of savings or you are an additional-rate taxpayer.

A Cash ISA might also be a good option if you’re looking to build an emergency fund because the money will be easily accessible.

Cons

Savings rates tend to be low and in a high-inflation economy that means that your holdings could be losing value in real terms.

If you do use a Cash ISA to hold your emergency fund, be sure to limit it to three to six months of your household expenditure and consider other options for any amount above this.

The ISA allowance for both a Cash and a Stock and Shares ISA is £20,000. It has been at this amount since 2017. This freeze was recently deemed a “stealth tax” by This Is Money, who also questioned whether a Cash ISA was still worthwhile.

There are pros and cons to a Stocks and Shares ISA too

Pros

Stocks and Shares ISAs (like Cash ISAs) are tax-efficient and any gains you make are free of Income Tax and Capital Gains Tax (CGT).

A Stocks and Shares ISA invests in the stock market, which means you have the potential for investment growth, though with the added risk that your fund value can fall as well as rise. The chance to match or even beat inflation in the current climate might make a Stocks and Shares ISA particularly appealing.

As with all forms of investment, you’ll need to have a long-term goal in mind and be sure about your risk profile and capacity for loss.

A long-term investment will allow your fund the chance to ride out any periods of short-term volatility, such as we saw in March 2020 at the onset of the coronavirus pandemic. More recently, Russia’s invasion of Ukraine has caused a large amount of uncertainty in markets.

Cons

The main disadvantage of a Stocks and Shares ISA is the potential for your funds to fall in value. However, the general trend of the markets is upward.

At Expert Wealth, we can help to put a financial plan in place for your that minimises risk while maximising your chances of attaining your long-term goal.

You must be over 18, and a UK resident, to open a Stocks and Shares ISA.

Get in touch

Former pensions minister Steve Webb recently described high inflation as “a tax on savers”. With inflation continuing to rise, it’s a “tax” that is likely to bite for your Cash ISA holdings but there are risks attached to a Stocks and Shares ISA too.

If you’d like to discuss the pros and cons of the ISA you hold, or you have any other questions about any aspect of your long-term financial plans, please get in touch and speak to us today.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.