Home Business News £10,000 in cash in 5 years’ time could be worth just £8,500 in today’s money

£10,000 in cash in 5 years’ time could be worth just £8,500 in today’s money

by LLB Finance Reporter
7th Apr 22 12:17 pm

New research from Aviva reveals that more than two thirds of Brits (71%) manage to save at least some money every month, despite the current economic landscape.  The average amount saved is around £194 per person, per month and most (37%) prioritise a ‘good return on their investment’ over other factors.

Those who use Individual Savings Account (ISAs) as a vehicle for saving to take advantage of their tax allowances,  tend to hold Cash ISAs (75%) rather than a Stocks and Shares ISA (18%) – this has been a steady picture across the market since ISAs were first introduced in 1999.

According to Aviva’s research, the bias towards Cash ISAs is partly because investors believe Stocks & Shares ISAs are ‘too risky’ (19%); they think it’s just ‘easier to pay into the Cash ISA they already have’ (15%) and, one in nine (11%) ’worry they won’t be able to withdraw the money if they need it.’

Unfortunately, this reliance on cash could be costing savers hundreds of pounds every year.  While Cash ISAs, or cash savings in a current account, may seem the safest option with their steady, but fairly low rate of return, as inflation hits its highest level in 30 years (6.2%), millions who have Cash ISAs or hold cash in their current account are losing money month after month, in real terms. Aviva estimates that a cash amount of £10,000 in 5 years time might be worth only about £8,500 in today’s money, if inflation moves as predicted.

Aviva’s study reveals that, the three most important features for investors on any of their savings is ‘a good return on investment’ (37%); ‘ability to draw money out at any time’ (33%) and ‘low fees and charges’ (28%). The ability to ‘save small amounts of money each month’ was also important to one in five (21%).

As the tax year ends (5th  April), this is an excellent time to review what is saved, where it’s saved and to think about making the most of those savings and investments using tax allowances to meet these four key demands.

ISA Myths:

There is a common misconception that ‘you need a lot of money to open an ISA account’ (36% believed this to be true or were not sure), or ‘you cannot access your money for an extended period of time’ (61% believed this to be true or were not sure) – both of which are false.

From 6 April 2022, you can open a Stocks & Shares ISA with Aviva with as little as £25 per month; pause monthly payments and re-start when you want; and access your money at any time, without penalty.

As with any higher risk investment, some fees and charges do apply for administration [typically, fund charges of 0.35% per annum and product charges of 0.4% depending on how much is invested]. It’s also important to remember that the value of an investment in a Stocks & Shares ISA can go down as well as up, so you may get back less than you put in.

With an ISA there is no income tax or capital gains tax on money you save. Each tax year you can save up to £20,000 in an ISA account. This can be in one account, or spread across two or more of the four types – Cash ISA, Stocks & Shares ISA, Innovative finance ISA and Lifetime ISA –  only half (49%) of our survey respondents correctly identified this fact as being true.

Richard Kelsall, Senior Propositions Manager at Aviva says, “There is a natural nervousness about investing in the stock market right now, but there is equally a lot of confusion about what a Stocks & Shares ISA can and cannot offer you.

“It is more than 30 years since we last saw inflation at its current level and so for many, today’s rising prices are a distant memory and for some it is entirely new, uncharted territory. Clearly the cost of living squeeze means that not everyone can afford to save anything right now, but those with a little extra to spare can often make their savings work much harder for them.

“While its always important for people to hold some form of easily accessible cash savings for day to day living and emergencies – many household essentials are at the forefront of inflationary pressures. Cash ISAs remain most popular amongst ISA investors, but they only provide savers with relatively low return.

“However,  if an investor is looking to keep up with, or beat, inflation and  willing to take a longer term view they could secure a higher rate of return on their investment by looking at a Stocks & Shares ISA.

“Overall, a portfolio of different types of assets (i.e. equities, fixed interest accounts, property and ISAs etc) is generally considered to be balanced and robust enough to provide good returns over the longer term. It’s also vital to shop around for the best deal and take advantage of the tax allowances available.”

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