Stocks and Shares ISAs Overtake Cash: Is This a Fad or a Trend?

While it may seem like a strange thing to say, cash seems increasingly unfashionable in 2017. 
After all, we have recently seen notes and coins toppled from their perch as the number one payment method in the UK, with card and contactless transactions now accounting for more than half of all retail purchases. By themselves, card transactions now account for 42.6% of the market, with cash taking care of just 42.3% in comparison. 
This makes a great deal of logical sense, of course, particularly when you consider the improved security and flexibility that card payments offer in the modern age. It is also fair to say that customers find it altogether hard to part with cash, with card payments helping many to overcome any psychological challenges associated with spending.
Despite this, we are also seeing cash become less popular in the world of financial savings, where it has typically held sway for generations thanks to its ability to provide reassurance and a tangible representation of wealth. More specifically, the amount now invested in stocks and shares ISAs has overtaken the equivalent sums deposited in cash alternatives, as customers continue to embrace new and diverse savings vehicles.
The Numbers: How has the Landscape Shifted This Year?
At the end of the 2016/17 tax year, it was estimated that stocks and shares ISAs held a cumulative total of £315 billion in the UK. In contrast, the corresponding figure for cash ISAs declined to just £270 billion, which represented an estimated 20% drop year on year.
Similarly, the number of people subscribing to stocks and shares ISAs also increased during the last tax year, reversing a trend for falling subscribers that had emerged since the Great Recession. This also suggested that savers were switching their allegiance from cash in a bid to optimise their returns in a challenging economic climate.
These numbers showcase the sheer scale of the change that has taken place over the last 12 months, as customers have begun to appreciate the core benefits of stocks and shares ISAs (including minimal tiered service fees and a huge diversity of available assets). Aside from this, customers have also been swayed by the declining value of cash in a strained economy, and this has arguably had the biggest impact in the minds of UK savers.
Why Has Cash Lost its Shine?
Since the beginning of the year, low interest rates have plagued cash accounts, with the Bank of England (BoE) retaining a minimal base rate of just 0.25%. This has triggered a gradual decline in the average interest rates available through high street lenders, affording savers a minimal return on the disposable income. This issue has been compounded by soaring inflation, which increased to 2.9% in September and continues to impact negatively on the cost of living. With real wage growth also stagnant, cash is depreciating in value and forcing savers to seek out more lucrative vehicles.
The inclusion of the so-called ‘personal savings allowance’ during the last tax year also altered the mind-set of savers in the UK, by allowing base-rate tax payers to receive £1,000 of cash interest tax-free each year. This benefit can be accessed without the rigidity of a cash ISA, enabling savers to potentially open a stocks and shares ISA alongside a traditional savings account. When you combine these factors, it is not hard to see why the popularity of cash ISAs has dwindled as the financial landscape has changed.
Our Final Thoughts: Is the Decline of Cash ISAs a Fad or a Trend?
While these factors have had a seminal impact on the appeal of cash ISAs, it is important to note that neither are permanent fixtures of the financial or economic landscape. After all, there is constant speculation that the BoE will look to increase interest rates incrementally over the course of the next 12 months, with the next policy meeting pencilled in for November 2nd. Similarly, the personal savings allowance is also vulnerable to change at the end of every tax year, and shifts in either of these metrics could see cash ISAs become more popular once again.
The prospect of this decline being short-term seems unlikely, however, as the economic climate is almost certain to remain unchanged for the foreseeable future. The personal savings allowance has been extremely well-received by customers, for example, which in turn makes it a popular policy feature for the current Conservative government. In terms of interest rates, any potential increase is likely to be part of a long and arduous process, and there is no guarantee that the BoE will look to trigger an incremental rise of 0.25% in two weeks time.
We must also consider the continued impact of inflation, which remains disproportionately high to earnings and is not expected to drop any time soon. This is leaving customers with far less money to commit to savings, encouraging them to seek out more flexible and cost-effective vehicles that can generate a higher return. 
In this respect, the decline of cash ISAs and the rising popularity of stocks and shares accounts is certainly more of a trend than a fad. With that being said, it is not guaranteed to continue indefinitely, so it is important to keep your finger on the economic pulse and ensure that you access savings vehicles that can optimise your returns in real-time.

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