The amount of money savers put into cash Individual Savings Accounts (ISAs) has fallen, data published by HM Revenue & Customs (HMRC) has revealed.
During 2016/17, £39.2 billion was saved using cash ISAs – a significant fall when compared to 2015/16’s figure of £58.7 billion.
The data also revealed that the amount invested in stocks and shares ISAs reached a ‘record high’ of £22.3 billion in 2016/17, up from £21.1 billion in 2015/16.
Meanwhile, separate data published by the Office for National Statistics (ONS) revealed that the savings rate fell to 1.7% during the first quarter of 2017.
The ONS stated that the savings ratio has been falling ‘since 2015’, and suggested that it has been affected by low interest rates, which have helped to reduce the return on accounts.
Commenting on the data, Steve Webb, Director of Policy at Royal London, said: ‘These latest figures show that the shine has really come off cash ISAs.
‘Low interest rates, coupled with rising inflation, mean that cash ISAs have delivered negative real returns year after year.
‘It is to be hoped that this slump in saving through cash ISAs means that investors have started to realise the risks associated with keeping their money in cash.’
An estimated 28,000 individuals have taken out cash Lifetime ISAs with Skipton Building Society – the only provider currently offering a cash version of the product.
It revealed that the new cash Lifetime ISA is proving to be popular with younger savers in particular: 51% of accounts have been opened by individuals under the age of 30.
Introduced in April, the Lifetime ISA allows savers under the age of 40 to deposit up to £4,000 each tax year. They will then receive a 25% bonus from the government on any savings put into the account before their 50th birthday.
The tax-free savings and the government bonus can be put towards a deposit for a first home in the UK, or can be withdrawn from the age of 60 for retirement purposes.
Skipton Building Society’s cash Lifetime ISA currently offers a rate of 0.5%.
Kris Brewster, Head of Products at the building society, said: ‘We believe the Lifetime ISA could make a real difference to a new generation of savers, not only in helping them get a foot on the property ladder but providing them with another option to help them save for their future too.’
Other providers offer stocks and shares versions of the Lifetime ISA. However, some have chosen not to offer the product due to its complicated rules.
The first cash-only Lifetime ISA is being launched this week, allowing adults under the age of 40 to put aside cash sums in order to save for their first home or their future retirement.
The Lifetime ISA was introduced in April, but initially only share-based investments were available. The Skipton Building Society is now offering the first cash Lifetime ISA, with an interest rate of 0.5%.
Under the scheme, savers aged between 18 and 39 can invest up to £4,000 a year and will receive a 25% bonus on contributions from the government up until their 50th birthday.
Funds can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from the age of 60, tax-free.
The savings and bonus can be used towards a deposit on a first home worth up to £450,000.
However, where the funds are withdrawn before the age of 60 the account holder will lose the government bonus (plus any interest or growth on this) and will be liable to pay a 5% surcharge.
The Financial Conduct Authority (FCA) has suggested that Lifetime ISA providers should warn savers of the potential risks associated with the new savings vehicle.
Announced in this year’s Budget, the Lifetime ISA will be available to savers from April 2017, and is designed to permit individuals under the age of 40 to save for a first home or to save towards their retirement.
Savers who open a Lifetime ISA will be able to pay in up to £4,000 per tax year, receiving a 25% bonus from the government for every pound they put in. Individuals who save the maximum will receive a £1,000 bonus each year.
Under the FCA’s proposed rules, providers will be required to supply specific warnings to consumers at the point of sale, reminding them of the importance of having an appropriate mix of assets within their Lifetime ISA.
Alongside this, firms will need to remind savers of the early withdrawal charge and any other charges.
The financial regulator stated that it intends to ‘regulate the Lifetime ISA in the same way as other ISA products’, but will also create new protections designed to ‘reflect the dual purpose of a Lifetime ISA and the restrictions on accessing funds’.
The FCA will carry out a consultation on its proposals in an effort to implement the new rules before April 2017.
The Government has launched a consultation on the new pensions advice allowance, which will permit those nearing retirement to withdraw up to £500 from their pension pots tax-free to put towards the cost of regulated financial advice.
This will enable individuals to receive advice on the various financial products that may contribute towards their retirement income, such as savings within an ISA and multiple pension pots.
The public consultation seeks views on the specific details in regards to the allowance, such as the eligibility age and how to promote the scheme effectively.
It also seeks input as to whether to allow multiple uses of the allowance in order to permit individuals to receive advice at different stages of retirement.
Simon Kirby, Economic Secretary to the Treasury, commented: ‘Pensions and savings decisions are some of the most important a person will make during their lifetime.
‘It is therefore vital that people can access the financial help they need and feel confident choosing the support that works for them in their retirement.
‘I look forward to the industry engaging with the pensions advice allowance consultation, and taking this opportunity to tell us how the allowance could best meet the needs of both consumers and firms.’
However, experts have warned that the allowance, which is set to come into force from April 2017, may not be available to all, and that £500 would not be enough to cover the cost of quality advice.
The consultation closes on 26 October.
Pension providers and banks are urging the Government to delay the April 2017 launch of the new Lifetime ISA, warning that they will not be ready to offer the savings product by this time.
The Lifetime ISA was announced in the 2016 Budget by the former Chancellor, George Osborne.
It will offer Government-backed support to first-time home buyers and seeks to encourage those aged under 40 to begin saving for retirement.
Pension providers Aegon and Standard Life have stated that they have delayed their plans until final details regarding the Lifetime ISA are released.
The Financial Conduct Authority (FCA) is yet to consult on the initiative. Steven Cameron, Pensions Director at Aegon, stated that a consultation is ‘likely to take three months’ to carry out.
Meanwhile, a spokesperson for Standard Life said: ‘As we want the Lifetime ISA to be a success, we would prefer that its launch is delayed until providers receive more detail on the product and how it is to be implemented.’
The Treasury said that full details would be confirmed in the autumn.
First-time buyers wishing to save for their first home within a Help to Buy ISA may be priced out of the Government scheme, a recent investigation by the BBC has found.
The Help to Buy ISA, introduced in December 2015, allows first-time buyers to get onto the property market by depositing money into a tax-free savings account, subsequently receiving a 25% Government bonus, up to a maximum of £3,000.
However, this 25% bonus is only applicable if the home purchased is below the national cap of £250,000, or £450,000 in London.
The investigation by the BBC has revealed that, in multiple areas around the country, the average price of a first-time home surpasses the purchase cap. Outside of London, the average price of a two-bed home exceeds the cap in 28% of areas.
The housing charity Shelter stated that the scheme only benefited ‘the lucky few’, and that the Government needs to direct more focus towards building new homes.
Commenting on the findings, a Treasury spokesperson stated: ‘The property price cap allows the Government to target support at those who are saving to buy their first home’.
In addition, the new Lifetime ISA, which is due to launch next year, will have a limit of up to £450,000 on house purchases. The scheme will permit prospective buyers to transfer their savings from a Help to Buy ISA into a Lifetime ISA.