The end of the cash ISA?

In the wake of the global financial crisis in 2008-09, central banks across the globe were forced to
cut interest rates to emergency low levels. They have remained at close to zero – even negative in Europe and Japan – ever since. The subsequent fall in the return from bonds has presented a challenge for savers and investors seeking a secure income stream.

Ten years ago investors could receive a 5% income return from a cash deposit or UK Government bond. In the wake of the Brexit referendum vote, the Bank of England has cut base interest rates to 0.25% while 10-year UK Government bonds currently return just over 1% (source: Bloomberg). Therefore, after taking account of inflation, savers are effectively losing money in real terms.

In recent years, cash ISAs have allowed savers to build up a cash reserve within a tax-free environment. However, with the new personal savings allowance, taxpayers are now able to earn £1,000 of savings income (£500 for higher-rate taxpayers) with no tax, so a significant benefit of cash ISAs has effectively been nullified.

So for those who have sufficient cash reserves to cover short-term and emergency funding needs, and who can tolerate a degree of investment risk, there is considerable merit in considering transferring a cash ISA into a stocks and shares ISA in order to seek to generate a return ahead of cash and inflation.

By investing in a portfolio of assets, diversified by asset class, geography and sector, investors can aim to achieve strong risk-adjusted returns in the medium to long term, generating an income stream in excess of cash plus the potential for growth in capital. The appropriate blend of asset classes should be adjusted for all stages of the economic cycle, and each portfolio can be tailored to meet individual investment objectives, income requirements and risk tolerances.