The amount of money invested in cash Individual Savings Accounts (Isas) has fallen by a third year-on-year, according to new figures from HM Revenue and Customs (HMRC). In the 2015-16 financial year, savers paid £58.7 billion into cash Isas, but this dropped to £39.2 billion in 2016-17.
The decline comes as low interest rates and tax changes have made cash Isas less attractive. Since April 2016, savers can earn £1,000 a year in tax-free interest from any savings account, reducing the tax advantage previously exclusive to Isas.
Ritu Vohora, investments director at M&G Investments, said: “Savers finally seem to be waking up to the reality of inflation eating away returns. Real savings rates have effectively been negative for some time now, when you take price rises into account.” She noted that £5,558 invested annually in a cash Isa over five years would have grown to £27,906, while the same amount in a stocks and shares Isa would have generated £34,675.
The overall savings rate in the UK has also fallen, with the Office for National Statistics reporting a record low of 1.7% in the first quarter of 2017. Rising inflation, currently at 2.6%, has further eroded the value of cash savings.
A Treasury spokesperson defended Isas, saying: “ISAs are a great way of saving for the future in a tax efficient way and over 21 million people are already using them. The total amount held in cash ISAs reached a record high £270bn this year.”
