New data reveals that UK households saved £184 billion during the pandemic, with many choosing to open an ISA to store their spare cash. So what else did the data tell us? And should you join the ISA bandwagon? Let’s explore. [top_pitch]
ISA applications hit a five-year high during the pandemic
According to Salisbury House Wealth, the number of ISA applications rose by 79% last year to reach a five-year high. A total of 388,363 ISAs were opened in 2020, compared to 216,933 opened in 2019.
Interestingly, it seems as though last year really bucked the trend. That’s because prior to 2020, the number of ISAs opened had fallen every year since 2017. Back in 2017, 284,571 accounts were opened, compared with 253,373 in 2018 and just 216,933 in 2019.
Why have ISAs increased in popularity?
There’s no doubt that the pandemic created a number of accidental savers. That’s because successive lockdowns closed shops, pubs, restaurants and other entertainment venues, making it trickier to spend money.
It’s also worth bearing in mind that the pandemic pushed many towards home working, meaning they saved on travel costs too.
Looking at this surge of applications, it’s clear to see that many new savers have simply looked towards ISAs as a first port of call. However, Tim Holmes, managing director at Salisbury House Wealth, warns that people shouldn’t necessarily stick to a Cash ISA and should instead, look towards Stocks and Shares ISAs.
He explains: “The pandemic has helped many people build up a healthy amount of savings, but people need to be smart about what they do with this. UK savers have traditionally overinvested in cash ISAs, which has resulted in the value of their savings decreasing substantially.
“People should consider investing into a Stocks & Shares ISA, where they will retain the tax benefits of an ISA, with better returns over time. As always when investing, it’s important to stagger investments in equities and diversify your portfolio to minimise risk.”
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How do ISAs work?
ISA is short for ‘individual savings account’. There are four main types:
- Stocks and shares ISA – allows you to keep your investment income tax free.
- Innovative finance ISA – allows you to invest in peer-to-peer lending.
- Lifetime ISA – targeted at first-time buyers, or those keen to save for retirement.
- Cash ISA – allows you to save without paying tax on the interest you earn.
Everyone gets an annual tax-free allowance that covers all types of ISAs. In the 2021/22 tax year, the allowance is £20,000. If you don’t use it, then you can’t carry it over to the next tax year.
Which type of ISA should you open?
Cash ISA’s have taken a lot of stick in recent times, as interest rates on these products have lagged behind rates offered on normal savings accounts. For this reason, many who want to save in cash may be better off sticking to a normal savings account, unless close to their personal savings allowance limit.
For those looking to invest, it may be better to look into opening a stocks and shares ISA. That’s because these products work just like normal investing accounts, apart from the fact that your returns are tax free (up to the annual limit).
If you’ve yet to buy a home and you’re aged between 18 and 39, then it’s also worth exploring a lifetime ISA. You can either hold a lifetime ISA in cash or stocks and shares. You can save up to £4,000 a year in a lifetime ISA and the government gives a 25% bonus, up to £1,000 a year towards your first home or retirement.
Keen to learn more? Take the time to read the Motley Fool’s ISA basics guide.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
