It’s been a record-breaking year for ISA subscriptions in the United Kingdom, with the £100 billion mark for total annual investments broken for the first time. But what’s driving so many Britons to open individual savings accounts?
The 2023/24 tax year saw around £103 billion subscribed to ISAs, as well as a further £1.8 billion contributed to Junior ISAs. The record-breaking figure smashed the next-highest year for investment, when £83.24 billion was added in 2014/15.
But what’s driving the ISA boom? Let’s take a deeper look at the psychology driving the record-breaking deposits into individual savings accounts in recent years.
Uncertainty Spreads Fear
Fear appears to be one fundamental cause behind why so many Britons are boosting their ISA savings. Today, as speculation surrounds Chancellor Rachel Reeves’ plans for the future of the individual savings account, more savers appear to be boosting their deposits into Cash ISAs.
Speculation is rife that the chancellor will ultimately cut the annual tax-free allowance for Cash ISA savings from £20,000 to just £4,000, which has spurred more Britons to maximise their savings potential while they still can.
Of course, this doesn’t account for the £103 billion invested in the 2023/24 tax year before Reeves became Chancellor of the Exchequer, but uncertainty over the future of ISA savings was rife at the time surrounding the intentions of Reeves’ predecessor, Jeremy Hunt.
In 2023, a report by a government think tank suggested that £1 billion per year could be made in taxes by placing a £100,000 limit on the amount that can be held in ISAs.
Ultimately, the suggestion was never acted upon, and Hunt was replaced by Reeves one year later. But uncertainty surrounding ISAs has persisted and appears to be a catalyst for Britons to build their savings in preparation for any unwelcome future changes to their ability to save in a tax-efficient way.
Given that Cash ISA savings more than doubled in 2023/24 in comparison to just two years prior, it’s clear that uncertainty over the future of cash savings is prompting more investors to make contributions.
The Lure of High Returns
The 2023/24 tax year also saw a highly conducive environment emerge for both Cash ISA and Stocks and Shares ISA investors.
In August 2023, the Bank of England hiked interest rates to their peak of 5.25%, meaning that many Cash ISAs at the time were offering exceptionally high returns as savers sought to combat the risks of high inflation, which was having a devaluing effect on their cash.
At the same time, the S&P 500 index in the United States, which tracks the nation’s largest 500 stocks, began to rally amidst an artificial intelligence boom that was sweeping throughout Wall Street.
The S&P 500 grew 22.3% and 22.7% in 2023 and 2024, respectively, inspiring more investors to use their full £20,000 Stocks and Shares ISA allowance to gain exposure to US stocks.
Given that the past 10 years have seen the average annual return on Stocks and Shares ISAs amount to 9.64% and Cash ISAs reach 1.21%, the far greater earnings potential shown in recent years has been telling.
Although ISAs have long been seen as a leading means of growing the wealth of subscribers, the lure of higher returns inspired more Britons to build their accounts in a more meaningful way in 2023/24.
The Cost-of-Living and Flexibility
Another key psychological impact that’s aiding the recent ISA boom is the cost-of-living, and the greater need of savers and investors to have easier access to funds should they need them.
Pensions have long been identified as an essential long-term investment strategy, but given that the last 20 years have seen Britons contend with two significant market crashes, historically high inflation, and a far-reaching cost-of-living strain, more investors are embracing the appeal of easy-access savings.
As investment platforms like Wealthify stipulate in the terms of their Easy Access Cash ISA, savers can make a withdrawal of their funds at any time and have the freedom to then replace the funds at a later date without affecting their annual £20,000 ISA allowance.
Rather than with pensions, where funds are locked away until you reach retirement age, ISAs offer savers a greater level of access to cash, meaning that Britons can use individual savings accounts to build a rainy day pot, make a one-off purchase, or simply grow their wealth at a pace that suits their needs.
The Future of ISA Savings
The economic landscape helped to draw more savers than ever before to ISAs in the 2023/24 tax year, and with more uncertainty surrounding the chancellor’s plans for annual allowance changes, we can expect more money to be subscribed to ISAs this tax year.
As a leading tax-efficient means of growing your wealth, the psychology of turning to ISAs to build savings during periods of uncertainty is clear. As one of the UK’s best-loved flexible ways to save, it seems that our love for ISAs isn’t going away any time soon.
