HM Revenue & Customs has reported that in the tax year 2015/16 80% of the 12.7 million people who invested in Individual Savings Accounts put their money into cash ISAs – a similar figure to that for 2014/15. This, despite historically low returns and with little current prospect of beating inflation.
Insurers Royal London have calculated that the consequence of investing in cash ISAs rather than stocks and shares ISAs is that investors have missed out on £100 billion of returns.
The term ‘stocks and shares’ ISA is somewhat misleading, because for most people the alternative to a cash ISA is to use the ISA allowance to invest in managed funds, rather than individual stocks and shares.
These can invest in widely diversified portfolios of stock and shares and bonds and thereby greatly reduce the risk of investing in individual shares.
For those wishing to switch their cash ISA to a stocks and shares ISA, it is important not simply to sell the ISA but to make a formal ISA transfer request, so as not to lose the ISA’s tax-efficient status. If lost, this cannot later be reclaimed.