BLOG: The importance of the Cash ISA

As we enter the second Covid-19 lockdown, there is no doubt that the pandemic has had a profound impact on the way many of your clients will approach their finances. Bank of England data shows that net new household deposits soared during the lockdown period, averaging around £17.2 billion per month between March and June (1).

We also saw cautious spending behaviour persist beyond the initial lockdown period. A recent survey of Paragon customers showed that 60% of our customers were still spending less in September than they were prior to lockdown. This is despite most of the economic restrictions starting to lift, ahead of the second national lockdown.

However, data shows that many savers are still piling money in instant access savings accounts, many of which offer little to no interest. A staggering £38billion has been put away into easy access saving accounts between March and August 2020 (2), a 290% increase on last year’s growth (3). This is despite 42% of instant access balances earning a rate of 0.1% or below (4) – this has nearly doubled since February, where only 21% of balances earnt such a low rate.

While deposits to instant access non-ISA accounts continue to explode, the number of ISA account openings across all product types has been down. This has halved during 2020’s ISA season (February to May) (5) compared to the same period in 2019, and overall deposits into ISA accounts have reduced by a third year-on-year (6) during that same period.

However, this downward trend is not consistent across the market. Paragon is one financial provider that has seen a strong ISA season this year, with a 65% increase in account openings compared to last year (7). We have also seen requests for ISA transfers double between February and May 2020 compared to the same period in 2019 (8). This follows the introduction of a range of new product features tailored towards supporting customers make the most of their ISA allowances by offering full flexibility.

This included the launch of the ISA Wallet, a feature that allows your clients to spread their £20,000 annual ISA allowance across multiple Cash ISAs with Paragon – offering them full flexibility to split the allowance between fixed rate and easy access products.

Paragon also introduced the Flexible ISA feature, which allows savers to replace funds withdrawn from their ISAs within the same tax-year without it impacting their tax-free entitlement. Most other providers do not offer this option and require any money withdrawn from an ISA to still be counted towards the yearly allowance; this means the funds cannot be replaced if savers have already reached their maximum allowance before making a withdrawal.

It’s important for your clients not to overlook cash ISAs and to continue to make the most of their yearly allowance – remembering that it’s easier than ever to shift between cash and stock and shares within the ISA wrapper. In the current market conditions, they might be tempted to give in to inertia and feel like there is less incentive to make the most of the tax-free allowance in any particular year. Tax-free interest remains a crucial resource when it comes to maximising the return on savings now and in the future.

As a first step, you might want to review their portfolios and consider how opening a cash ISA might help them stretch their interest a little further now and in the future. It’s important for your clients to consider what level of access they require on their savings and how much they can afford to lock away.

Once they’ve established those needs, it will be easy to identify the exact type of ISA that suits their requirements. If their needs are more complex and varied, it’s worth thinking about the best way to split an allowance between products offering varying levels of access.

Tax-free savings continue to offer excellent value for savers, especially those in higher tax brackets who don’t benefit from the Personal Savings Allowance. Putting money aside tax-free is a really simple way for your clients to make their savings work a little harder over time.

(1) Bank of England data, July 2020
(2) CACI’s Current Account & Savings Database, as of end of August 2020
(3) CACI’s Current Account & Savings Database, as of end of August 2020
(4) CACI’s Current Account & Savings Database, as of end of August 2020
(5) CACI’s Current Account & Savings Database, as of end of May 2020
(6) CACI’s Current Account & Savings Database, as of end of May 2020
(7) CACI’s Current Account & Savings Database, as of end of May 2020
(8) Paragon internal data

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