In his latest market update, Paragon Bank Savings Director, Derek Sprawling, provides his thoughts on how cash ISAs could soon close the gap on equities.

As we entered 2022 we had good reason to hope the economic worst of the last two years was behind us. The pandemic was starting to fade, growth was on the agenda, and consumer spending on the rise.

Six months on and things feel very different. Food and energy prices have driven inflation, the OECD now predicts the UK will record zero growth in 2023, and the UK economy shrank in March and April. The spectre of a recession looms over the economy, presenting savers with the challenge of how best to maximise their returns – and finding the right tools to do so.  

In a high inflation environment, it appears that savers have been chasing higher returns in equities. The first months of this year saw subdued cash ISA balance growth, and this trend appears to be continuing, with equity ISAs on the rise.

Over the last decade the overall value of equities and cash ISAs have risen steadily, from around £2bn each in 2011/12 to £2.9bn in cash and £4bn in equities recorded in 2020/21, but this divergence has not been a steady process, nor does it appear to be permanent.

Between 2011/12 and 2020/21 the total invested in equities has overtaken cash twice, followed by cash narrowing the gap until it eventually overtakes – before we see equities grow ahead once again.

The emergence of these patterns, starting in 2011, 2015, and 2020, appear to coincide with poor full-year performance figures for the FTSE. Mid-2011 saw the start of the European debt crisis, China recording its slowest growth in a quarter of a century in 2015, and the Covid pandemic in 2020 all impacting the market – but not always UK GDP, which continued to make modest year-on-year gains until the shuttering of much of the economy in 2020.

These moves also came at a time for changes to ISAs themselves. Between 2010/11 and 2020/21 the annual allowance rose in stages from £10,200 to £20,000, and since 2015 savers have been free to take money out of their ISA and put it back later in the financial year without losing the tax benefits. However, these changes do not appear to have had a significant impact on the overall amount being held in ISAs.

When flexible ISAs were introduced the value of cash and equities were both around £2.7bn and from this point cash remained relatively flat, but equities then rose sharply to a peak £3.5bn in 2017/18.

By 2019/20 this position had reversed, with cash rising to £3.2bn and equities dipping to £3.1bn.

This post-2015/16 cycle follows a similar trend to what the data records between 2011/12 and 2014/15, with only modest changes made to ISAs during this period beyond increases to the total allowance – but as before, this period does also show correlation with the improving fortunes of the FTSE following EU and IMF bailouts to defaulting nations.   

Is this a case of people seeing opportunities in underperforming stock and a troubled market then moving the money from cash to equities, then cashing out when the economy and the market improves?  The move from cash to equities in times of market volatility and fall suggests some investors switching asset class in an attempt to judge the ‘bottom’ of equity cycles and are definitely exacerbated by the relative growth in each asset class compounding new investments.

If the correlation between ISAs and the FTSE continues, and the country does head into the anticipated recession, we may well see the gap between equities and cash continue to grow into 2023, with it starting to decline again once the UK economy starts to right itself after a year of zero GDP growth - presenting savers and investors alike with the challenge of what is best for their savings and circumstances.  

No doubt those nearing retirement will consider a shift back from equities to cash within their ISA wrapper, boosting cash deposits.  Since July 2014 it has been possible to transfer back and forth from Stocks and Shares to Cash ISAs and it’s important savers utilise that freedom to manage their wealth tax efficiently and tailored to their own circumstances.

For further information contact:

Tom Frew
Media Relations Manager
Paragon Bank
[email protected] 

Notes to editors:

Paragon Bank PLC a subsidiary of the Paragon Banking Group PLC which is a FTSE 250 company based in Solihull in the West Midlands. Established in 1985, Paragon Banking Group PLC has over £13 billion of assets under management and manages over 450,000 customer accounts.

Paragon Bank PLC is authorised and regulated by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands, B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551.