One in three using cash ISA to fund retirement

More than a third of savers are letting their pension growth stall by keeping their retirement savings in cash ISAs.

A shocking 36% of us are relying on cash ISAs to build our pension pots despite interest rates being at record lows, according to new research by Alliance Trust Savings.

A nationwide survey revealed that one in three of us have more than £50,000 in savings with cash ISAs remaining the most popular home for it despite dwindling interest rates. Despite the stock market offering the potential for much better growth 91% of us keep our money in a cash ISA with only 29% of us holding a stocks and shares ISA.

“Although tax free cash ISAs can be a useful pot for short term or emergency funds, those with longer term plans for their money may suffer by missing out on the greater potential for growth that stock market-based investments can provide,” says Sara Wilson, head of platform proposition at Alliance Trust Savings.

“Our survey found that ISA holders across the UK are building sizable savings pots, with a third holding more than £50,000. With low interest rates and a rising rate of inflation, cash accounts could actually be losing you money, so those with large cash savings should consider moving at least some of their money into a stocks and shares ISA.”

Pension mistake

In its survey Alliance Trust Savings asked the reasons for holding money in cash ISAs. Below are what people said broken down by region.

Reasons for holding cash ISAs

	To build up a rainy day fund	To help fund my retirement	Saving for a deposit on a house	Saving to pay off my mortgage early
East Anglia	76%	21%	11%	8%
East Midlands	68%	30%	16%	14%
London	68%	30%	32%	17%
North	62%	48%	10%	10%
North West	70%	40%	16%	17%
Northern Ireland	87%	35%	4%	9%
Scotland	83%	39%	12%	5%
South East (excl. London)	69%	38%	10%	10%
South West	85%	36%	11%	15%
Wales	71%	43%	6%	11%
West Midlands	69%	40%	16%	9%
Yorkshire & Humber	72%	44%	4%	7%
National Average	73%	36%	13%	11%

On average a third said they were using their cash ISA to build a retirement fund, rising to almost half for those living in the north.

The issue with using a cash ISA to save for retirement is that you could be putting yourself at a disadvantage.

At present the best possible interest rate you can get on a cash ISA is a meagre 1.5%, and in fact most people are earning far less than that. With inflation at 1% that means your money is barely growing. For long-term savings, such as funding your retirement, you are highly likely to get a better return by investing in the stock market.

“The Bank of England’s data show that the average return on a cash ISA now sits at 0.65%, meaning that savers are making next to nothing in deposit accounts,” says Gareth Shaw, head of consumer affairs at Saga Investment Services.

People should be looking at other ways to make their money work harder. The yield on the FTSE 100, for example, is currently around 3.7%, and a steady transition from cash to stocks and shares has the potential to transform the returns that can be achieved. Many savers may be reluctant to put their capital at risk, but sticking steadfastly to cash in the current environment could do them a great deal of harm.”

Another issue with putting your retirement savings into an cash ISA is that you are missing out on the tax benefits of saving into a pension. Any contributions you make to a pension are subject to income tax relief. This means a basic rate taxpayer putting £80 into a pension will get a £20 top up from the government to reflect the income tax they paid on that £80. This means your pension pot is immediately boosted and there is more money in it to grow. Invest in an ISA and any growth is free from income tax but you don’t get that immediate cash boost.

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