ISA subscribers turn to investing during pandemic

In a period when UK household savings hit record levels, savers shunned the rock-bottom rates on offer from cash ISAs and turned to investing in stocks and shares ISAs – writes Christian Leeming

Data released by HMRC today revealed that around £72 bn was subscribed to adult ISAs in the 2020/21 tax year, a decrease of £2.4 bn compared to 2019/20.

The decrease was driven by a sharp fall in cash ISA subscriptions from the 2019/20 tax year, which dropped by £12 bn; meanwhile, the amount subscribed  to stocks and shares ISAs increased by £10 bn over the same period. 

With time on their hands because of the restrictions imposed to control the coronavirus pandemic, and possibly with more money in their pocket as a result, large numbers of people sought to take control of their finances, opening accounts with a whole range of DIY investing platforms and investment managers – ‘Coronavirus lockdown fuels spike in DIY investing’ 

DIY investment platforms reported activity that far outstripped what would be considered a normal uplift around ‘ISA season’, with investors looking to take advantage of shares that had tumbled in value as Global markets fell and benefit from the recovery. 

Platforms reported existing investors managing their own ISAs and SIPPs had been sitting on higher cash positions than normal before the coronavirus crisis began, as global markets hit all-time highs; it appears that many took the dip as the opportunity to rejoin the fray as AJ Bell reported trading volumes of roughly double what it would expect in normal market conditions with a 70/30 split in favour of buys. 

This figure suggests that DIY investors adhered to received wisdom as to how best to respond to such circumstances by taking a range of small positions in companies or funds they consider to have been oversold. 

Another trend is that platforms reported that new investors were typically younger, with Hargreaves Lansdown’s Danny Cox observing at the time: ‘We have seen elevated demand for new savings and investment accounts, with a slightly younger profile than we would normally expect’.  

Interactive investor reported that ISA subscriptions from 30-44 year-olds were up 30%; with a longer horizon, they are more inclined to be investors than savers. 

One of the most important factors to those that feedback re DIY investing is the feeling of being in control; many will have experienced the short, sharp economic shock delivered by the pandemic and pledged not to be caught out again. 

As we reported in ‘Lockdown 2.0: Increasing numbers take personal financial responsibility and turn to DIY investing’, those that turned to DIY investing for the first time during lockdown and stayed in the market should have done well. 

Whilst timing the market is generally not recommended, after the initial shock of the Covid crash from February to April 2020, savers apparently girded their loins and took advantage as markets bounced back strongly, and sectors such as technology, healthcare and ESG began a long period of outstanding performance, buoyed by huge stimulus programmes from government and central banks. 

The latest HMRC data regarding ISA subscriptions shows that during the lockdown period when the UK household savings ratio reached record levels, households increasingly channeled their money into investments as they sought positive real returns, rather than the meagre returns on offer from cash deposits.  

‘The increase of £10 bn in the annual total paid into stocks and shares ISAs during the 2020/21 tax year is significant and particularly so when viewed in the context that in the previous tax year the amount increased by just £1.6 bn.  

Given that the Bank of England slashed interest rates to an all-time low of 0.10% in March 2020, the fact that the funding of cash ISAs dropped by £12 bn in the period comes as little surprise.   

The number of cash ISAs subscribed to in the period decreased by 1.6 m compared to 2019/20, whilst the number subscribing to stocks and shares ISAs increased by 860,000 as savers sought better returns by turning to investing.  

Notwithstanding the rock-bottom interest rate environment, much of the waning popularity of cash ISAs is due to the fact that the Personal Savings Allowance allows savers to earn up to £1,000 of interest tax-free p.a. from regular savings account without the need to open a Cash ISA; this at a time when better interest rates were typically found on standard savings accounts, than those offered by many cash ISAs. 

With inflation now widely expected to hit 10% by the end of the year, the real value of savings is quickly eroded; despite recent stock market volatility, over the longer term investing in equities has consistently proved to be one of the best ways of getting inflation beating returns, and, as highlighted by the HMRC figures, that is apparently where DIY investors are increasingly focusing their efforts. 
 
 

About DIY Investor 

 
 
DIY Investor was conceived in the belief that financial self-reliance will become the norm as state provision of, for example, later life care or income in retirement becomes more uncertain. 

Whereas the ‘401k/fifty-nine-and-a-half’ conversation has long been a staple around US dinner tables, the UK has lagged in terms of levels of financial literacy and engagement because there has always been a safety net. 

However, with the pressures brought to bear by tuition fees, the cost of accommodation, squeezed wages, the ending of final salary schemes and uncertainty over healthcare and pensions, there is a dawning realisation that the only way to achieve any degree of certainty is to take personal financial control. 

The transition from being a spender to a saver, and ultimately an investor may not always be comfortable; where instant gratification is replaced by a long term commitment to achieving goals that may be decades away, an understandable response may be that of disappointment or chagrin. 

And then, wallop, along comes COVID-19, and it feels as though things will never be the same again. 

The DIY investors that contact us regularly identify the single most important factor for them is the feeling that they are in control; DIY Investor exists to provide access to good financial education and information to allow people to make informed decisions that will affect the future quality of their lives. 

The immediate response to the recent extraordinary circumstances suggests that the shift toward DIY investing has just massively accelerated. 

For those embarking on their journey to financial independence, never has there been greater choice in terms of the range of platforms that are available, nor more support in terms of the tools and content available to help you make informed investment decisions.  

Ideally you will invest as much as you can, for as long as possible, and take maximum benefit from the ‘miracle’ of compound interest; however, you can only start from where you are and doing something over a period, rarely delivers an inferior outcome to doing nothing, ever. 

Whatever your current level of knowledge or experience, however hands-on, or otherwise you want to be, there will be a platform ideally suited to help you achieve your financial life-goals; Do it Yourself, Do it With me, Do it For me – just don’t do nothing!