Whilst you might expect an increase in the cash and investment ISA limit to be welcomed, at least one dissenting voice has come from Steve Webb, former Pensions Minister and current policy director at Royal London. Webb has warned that the rise in April from the current annual limit of £15,240 up to £20,000 could encourage poor long-term investment choices.

The criticism is aimed at the cash element in particular. Webb has described cash ISAs as useful as a ‘rainy day fund’ but unsuitable as a way to help invested money grow. As such, he’s advised that a more appropriate investment limit for cash ISAs would be £5,000, just a quarter of the proposed new limit.

A report from Royal London backs up this view. Whilst cash ISAs continue to grow in popularity, the returns they offer often pale in comparison to many investment opportunities. Had all the money put into cash ISAs over the past decade been invested instead, the report estimates that savers would now collectively have £360 billion, significantly more than the actual figure of £250 billion. Inflation has also taken its toll on the value offered, with £26 billion worth of savings wiped out in the same period, thanks to cash ISAs failing to keep pace with inflation rates.

Most of us manage our finances in numbers a lot smaller than billions, however, so what does all of this mean? The latest figures show that £1,000 paid into a cash ISA a decade ago would be worth under £900 in today’s money. In contrast, had that money been invested in a typical multi-asset fund where money is spread across property, bonds and shares, it would be worth over £1,500 today.

Whilst this suggests that those looking to grow their money should opt for investments, it doesn’t take into account the safety of cash in the short term and the convenience of having money readily available in an ISA. The most important factor in making decisions around your finances is to think proactively. Think about your individual circumstances before you opt to tie your money up in an investment but, equally, don’t simply place it all in a cash ISA if you can afford not to touch your savings and allow them to grow. If you have any questions around this topic, please feel free to get in touch with us directly.

Sources
http://www.thisismoney.co.uk/money/saving/article-4176724/Cash-Isa-limit-cut-argues-Steve-Webb.html