AJ Bell says ISAs at record £620bn, but too much in cash

Salford-based investment platform AJ Bell said almost two million more people paid into ISAs in 2019-20 as the market hit a record valuation of £620 billion — but said the “vast majority” of people stick to cash despite “paltry” returns.

Citing HMRC data, AJ Bell said around 13 million Adult ISA accounts were subscribed to in 2019-20, up 16% from 11.2 million in the previous tax year.

AJ Bell said the number of people subscribing to Lifetime ISAs more than doubled year-on-year, from 223,000 to 545,000.

The Salford investment platform said 1.2 million more people paid into Cash ISAs in 2019-20, while the increase in subscribers to Stocks and Shares ISAs was only a quarter of this number – about 300,000.

The total amount paid into ISAs increased by £7.1 billion to £75 billion, with £4.8 billion extra invested in Cash ISAs versus £1.6 billion in Stocks and Shares ISAs.

AJ Bell senior analyst Tom Selby said:  “The popularity of ISAs remained as strong as ever in 2019-20, with both the number of people saving and the value of funds invested surging during the period.

“In fact, total funds invested via ISAs hit a record £620 billion in April 2020, driven by a 16% increase in funds held in cash.

“Those who held a significant proportion of their ISA in cash might have felt like they had dodged a bullet in March and April last year, when markets tanked as the UK entered its first lockdown.

“However, values have since recovered substantially, with the FTSE All share delivering whopping returns of 37% since April 2020 – a boon those invested in cash will have missed out on.

“There is of course nothing wrong with investing in Cash ISAs, particularly if your time horizons are relatively short.

“But the returns on offer remain paltry, with the best easy access Cash ISA paying just 0.46%, according (to) Moneyfacts.

“Those willing to lock their money away for 5 years could get a Cash ISA return of 1.21% – a significant improvement but hardly exceptional given many expect inflation to return to the economy over the next 12 months.

“By contract, the FTSE 100 is forecast to yield 3.8% this year.

“It is this inflation which poses one of the biggest risks to cash investors in the coming years.

“Anyone with a longer-term time horizon who is concerned about the impact of rising prices on their funds and happy to take some investment risk should consider putting at least some of their portfolio in stocks and shares …

“Interestingly, women outnumber men in the ISA world, with 10.5 million women investing using ISAs in 2018-19 compared to 9.7 million men.

“The average size of ISA funds held by women is slightly lower at £27,000 – compared to £30,000 for men – a difference which likely reflects disparities in earnings between the sexes.

“The fact more women tend to invest in ISAs than men may in part be down to savvy family tax planning.

“With men still on average earning more than women – and therefore more likely to benefit from higher-rate pension tax relief – for many families it will make sense to split savings down gender lines …

“Lifetime ISAs (LISAs) also saw a substantial jump in popularity in 2019-20, with the number subscribing to the product more than doubling to 545,000 during the tax year.

“All money invested up to £4,000 during the year will have benefitted from an upfront boost of 25%, up to a maximum of £1,000.

“Many of those who had invested prior to the pandemic will have used their LISA to buy a first home in 2020-21, driven to the market by the Chancellor’s decision to slash stamp duty.

“The availability of LISA funds tax-free where they are used for a first home purchase will have helped thousands of people get a foot on the property ladder – and may also have combined with the stamp duty cut to drive the house price boom we have seen over the last 12 months.”