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Don’t let opportunity pass by

Published: 25 October 2016

The growth potential of stock market investments is still being overlooked by cash ISA holders, even after interest rates fell to a new record low.

Research commissioned by Alliance Trust Savings in September found that only a fifth of cash ISA savers are looking to transfer at least some of their holdings into a stocks and shares version. The vast majority say they have no plans to take advantage of the switching flexibility that ISAs offer, missing out on the opportunity for tax-efficient stock market growth.

Cash remains king – but why?

The research asked people holding at least one form of ISA about the types of ISA they have and their reasons for using them. More importantly, given low interest rates, the research also looked at awareness of the switching flexibility around ISAs and the extent to which people had taken advantage of it.

It found that while nine in 10 people hold cash ISAs, less than a third have a stocks and shares ISA. And with interest rates falling to a record low of 0.25% in August, that suggests many people are not getting either the growth or income they are likely to need from their savings.

Savers wanting to take a little extra risk and seek better returns through equities can transfer some or all some of their holdings from their cash ISA to a stocks and shares ISA without their annual ISA allowance (currently £15,240, set to rise to £20,000 in April 2017) being affected.

But while 87% of those surveyed knew they could switch providers and 32% have done so, just 51% were aware that they can transfer a cash ISA into a stocks and shares version. Even fewer take advantage of this flexibility.

Just 16% are considering moving some of their cash ISA into a stocks and shares ISA in the wake of the August interest rate cut, with another 6% thinking of transferring their entire cash ISA and 6% intending to use their 2016/17 ISA allowance for stocks and shares instead of cash. But 62% said they would not be transferring from cash to stocks and shares.

Cash savings are not without risk

Yes, saving into cash accounts can offer peace of mind, particularly for those uncomfortable with the added risk of stock market-based investments. Yet relying entirely on cash isn’t without risk, as low interest rates mean that few cash accounts are able to protect savings against the effects of inflation.

While 70% of respondents said they saved into ISAs to give themselves a rainy day fund to fall back on, 45% were also using ISAs to build a retirement fund. This is worrying as those relying on cash ISAs to provide their pension income later in life may suffer by missing out on the greater potential for growth that stock market-based investments can provide.

Stock markets often perform better over the longer term

Past performance is not a guide to future performance. History does show that stock market-based investments outperform other main asset classes over the long term, especially when dividends are reinvested.

UK equities returned 2.3% in the 10 years to 2015 and 3.7% over 20 years, according to the Barclays Equity Gilt Study 2016. In contrast, cash was down 1.1% over 10 years and up just 0.9% over 20, which means cash savings will have lost value to inflation over those periods.

Long-term stock market returns are improved significantly by reinvesting any dividends paid out and so benefiting from the effects of compounding. A £100 investment in the UK stock market in 1899, with income reinvested, would have been £28,226 (adjusted for inflation) by the end of the study period, the Barclays Equity Gilt Study found.

Should you consider transferring to stocks and shares?

All of this means there’s a good case for anyone with their savings in cash, but wanting their money to work harder, to consider transferring at least some of it into a stocks and shares ISA.

The potential for more growth and income is perhaps the most obvious benefit if you’re able to set money aside for around five years or more. But transferring money from a cash ISA into a stocks and shares version is also a useful opportunity to consolidate.

Almost one in three of those surveyed have more than one ISA provider. Transferring their ISAs into one stocks and shares ISA and holding everything in one place could make it quicker and easier to see the value of their savings and investments, check performance and make any changes or queries.

If transferring is for you - could you save with our flat fees?

At Alliance Trust Savings we charge flat fees on your stocks and shares ISA Account which means, as your investments grow, your account fees won’t. For those with larger pots – whether achieved through growth or consolidation - that can add up to big savings over the longer term, leaving more to benefit from future growth.

Missed opp

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in October 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

Who knew?

If you consolidate your ISA investments elsewhere you might be surprised just how much your account fees could be.

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Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.