Historically, ISAs have been a very popular way for individuals to save money without worrying about a resultant tax burden. Now, however, these savings accounts may be falling out of favour.
In recent months, savers have withdrawn enormous sums from their ISAs, suggesting that they no longer place their trust in these accounts. The most significant withdrawals occurred in February, March and April of this year.
In February, a total of £51 million was withdrawn from the UK’s ISAs. In March, a further £682 million was withdrawn. Finally, savers removed a staggering £914 million in April.
It seems that ISAs really are falling out of favour. However, this raises several important questions.
Why are ISAs losing popularity so rapidly?
In our blog entitled ‘Why Savings Account Interest Rates are so Pathetic’, we explained that savings accounts have had abysmally low interest rates since the economic crash of 2008.
This is partly because of the need to keep the nation’s base interest rate low in order to cope with the economic fallout of the financial crisis and partly the result of other factors (such as the government’s Funding for Lending Scheme).
Continuing economic uncertainty over the EU and Brexit has also kept interest rates depressed. Undoubtedly, the low interest rates have made ISAs less appealing.
Of course, savers may also be moving away from ISAs as a direct result of Brexit. In times of economic uncertainty, many ordinary people feel that it’s best to have their money somewhere they can access it instantly, instead of trying to save it.
Will ISAs recover?
If the conclusions we reached above are correct, the popularity of ISAs may be restored if interest rates increase and economic uncertainty fades.
Depending on Britain’s economic position after Brexit, ISAs may enjoy a resurgence in popularity or may become a niche financial product.
In the meantime, individuals have other ways to save or grow their money, such as national savings bonds and other, more conventional investment opportunities (though it’s always worth remembering that the value of investments can decrease as well as increase).
Do ISAs have any value at present?
While ISAs have low interest rates, it may not be wise to write them off completely. Fixed-rate ISAs represent a fairly reliable saving option for individuals who aren’t seeking particularly high-yield savings options.
Of course, ISAs are less popular at the moment, but they will always be useful to certain types of savers.
Here at Best Savings Rate, we suspect that ISAs are likely to remain out-of-favour until Britain’s economic situation changes.
It may be best to think twice about removing any substantial sums, as this will mean you lose this allowance. Funds can be transferred between ISA types however, so you could consider P2P or Stocks and Shares ISAs – if prepared to take on additional risk.
However, it’s worth bearing in mind that all economic circumstances are, ultimately, temporary. Ergo, there is a reasonably good chance that ISAs will eventually regain their former prominence.