Our Savings Director, Derek Sprawling, reflects on the personal finance landscape as we near the end of the first quarter of 2021.

We are now in March and the end of winter is finally in sight. This week marks an important and long-awaited milestone - the lockdown restrictions have started to lift as part of a phased plan unveiled by the Government last month. While we are working to a clear timeline out of lockdown that will cumulate to a tentative return to ‘normality’ in late June, the pathway to economic recovery is a little harder to map out.  

Last month, the Bank of England published its latest Monetary Policy Report, in which it confirmed that the Bank of England Base Rate would be maintained at 0.1%. Despite the Base Rate remaining at a historic low, the report set out some optimistic forecasts, with the successful roll-out of the vaccine improving the economic outlook for the UK. 

However, it also emphasised that the long-term economic picture remains uncertain and is heavily reliant on how the pandemic evolves, and how households, businesses and financial markets respond to any developments, including the lifting of restrictions.  

ISA season is upon us

The approach of spring also indicates that a new tax year is less than a month away, which means it is officially the start of ISA season. However, whilst the savings market has boomed during the pandemic and household deposits have reached milestone highs, 2020 saw the cash ISA market grind to a halt.  

While the household deposits market now stands at £1.49 trillion1, the non-interest earning market has seen the most explosive growth during the pandemic as people piled excess cash into their current accounts or linked, non-interest bearing accounts. This category grew by an enormous 27% between January 2020 and January 2021, whereas non-ISA balances that earned interest increased by 15.2%.  

In contrast to this, ISAs grew by a minuscule 0.7%, a seven-fold decrease on the category growth in 2019. Indeed, Bank of England data shows that ISAs have been steadily declining since July. However, at the end of January 2021, the value of the ISA market still stood at £292 billion and ISAs remain an important savings vehicle for over 20 million people in the UK. Even if we have another subdued year, I expect that over 6 million people will, rightly, continue to subscribe to a cash ISA.  

This data begs the question – what will 2021’s ISA season look like, and have savers turned their back on cash ISAs? It certainly seems there is a downwards trend, which will be heavily influenced by the current market conditions. However, it’s important for savers not to lose sight of the long-term picture when choosing whether to invest their tax-free allowance by April. Any money saved in an ISA is tax-free for years to come – by not using their ISA allowance, savers are missing out on the opportunity to add to their life-long tax-free savings.  

Because the yearly ISA allowance is a ‘use it or lose it’ scenario, our advice to savers would be to remember that the current market downturn is temporary. When rates recover, the tax rules change or personal circumstances mean the Personal Savings Allowance is surpassed, their allowance will remain tax-free. They can choose to reinvest it, transfer it to a more competitive product or to a stocks and shares ISA. If they miss out on the opportunity to use their ISA allowance however, this is lost forever.