Are ISAs with cash becoming less popular?

According to new research, investors are reportedly ahead of potential government reform as cash ISA openings are lagging behind those of stocks and shares ISAs

As it searches for methods to revitalize the private markets in the United Kingdom, the government is considering reforming the Cash ISA. However, recent data raises the possibility that people are abandoning cash ISAs on their own.

You can use different types of ISA for different things. The two most common types of ISAs are cash and stock and share ISAs. While a stocks and shares ISA enables you to invest in funds, stocks, and trusts, a cash ISA essentially functions as a savings account with tax-free interest.

Cash ISAs were not specifically mentioned in chancellor Rachel Reeves' Spring Statement last week, but documents released after the event made it clear that the threat posed by cash ISAs still exists and that ISA reform is being considered.

Michael Summersgill, CEO of AJ Bell, said after the chancellor's statement, "The government has confirmed that a change to the status quo is being considered ahead of the Budget later this year, despite holding off on reform today. Labour had already committed to ISA simplification and encouraging greater use of stocks and shares ISAs during the general election campaign."

In order to encourage more people to invest in the stock market through a stocks and shares ISA, it is rumored that the government will lower the annual ISA limit specifically for cash ISAs, possibly to as low as 4,000 annually.

"In order to help people grow their wealth and promote overall economic growth, the government wants to encourage more people to invest. Investment platform InvestEngine's head of investments, Andrew Prosser, says.

While stocks and shares are rising, cash ISA growth is declining.

However, government action might not be required. The amount invested in stocks and shares ISAs is significantly higher than the amount held in cash ISAs, according to recent research from InvestEngine, which also shows that new cash ISA openings are decreasing while stock and share ISAs are increasing.

According to InvestEngines' analysis of HMRC data, the number of new stocks and shares ISA openings increased by 57% in the five years between 2018/19 and 2022/23, the most recent year for which data is available.

On the other hand, there was a 7% decline in the opening of new cash ISAs during that time.

This chart illustrates how many Cash and Stocks and Shares ISAs were opened between the 201213 tax year and 202223.

The chart displays how many ISAs for cash, stocks, and shares were opened between the 201213 tax year and 202223.

Comparing stock and share ISAs to their cash counterparts, more money is kept in the former. While cash ISA holdings increased only 9% to 294 billion over this five-year period, the amount of funds held in stocks and shares ISAs increased 37% to 431 billion, meaning that stocks and shares ISAs hold 46% more than cash ISAs.

HMRC Annual Savings Statistics 2024, accessed through InvestEngine.

Prosser says, "Our analysis shows stocks and shares ISAs are in fact increasing in popularity without the explicit need to make cash ISAs less appealing, even though reforms have been delayed."

In the past five years, have you opened a cash or stocks and shares ISA?

Which is preferable, cash ISAs or stocks and shares?

Investors and savers will be unsure of where to invest their money as the tax year draws to a close. The controversy surrounding cash versus stock and share ISAs has been going on for a while.

Actually, it's not a choice. Each kind of ISA has unique advantages and contributes to the development of long-term wealth and financial stability.

When you need your money, cash ISAs make it comparatively simple to access it. They're therefore a good place to put money aside for necessities. Your specific situation will determine how much you should save, but generally speaking, most experts advise having enough money saved to cover three to six months' worth of essential expenses.

Any additional funds over this should be thought about going into an ISA for stocks and shares. When compared to the stock market, funds held in a cash ISA typically perform poorly over time and frequently fall behind inflation.

Prosser asserts, "Past performance shows investment beats interest in the long-term." "The government should take advantage of this time to raise public awareness of how investing, particularly through simple, affordable, and diversified products like ETFs, could assist more people in reaching their financial objectives."

Even though you don't want to put your emergency funds into stocks and shares in case you need them during a stock market downturn, this is frequently the best way to increase your wealth over the long run.

"It makes sense for long term investors to favor investing over saving, even if it's in simple index trackers," says Dzmitry Lipski, head of funds research at Interactive Investor, in light of the high rates of inflation that are currently in effect and that many retail bank rates fall short of.

It makes sense for cautious investors or those nearing retirement to concentrate on capital preservation and limit volatility by keeping a healthy cash buffer within a well-diversified portfolio as we enter a more unpredictable market environment.

Given that it fell during a period of historically low interest rates and a stock market boom, InvestEngines' research indicates that this was a particularly bad time to invest in cash.

However, the collapse of the stock market at the end of the period may have caused a greater momentum turnaround than actually occurred.

Prosser claims that even though the pandemic's historically low interest rates are now over, the number of new cash accounts hasn't increased.