Cash Isas lose 1.6 million savers - why have they fallen out of favour?

Savers paid into just over eight million cash Isas in 2020-21, down from nearly 10 million the year before, according to the latest provisional savings data from HMRC.

By contrast, stocks and shares Isa subscriptions increased by 860,000, while lifetime Isa subscriptions saw modest increases of 8,000.

Here, Which? takes a closer look at the data to explore the UK's main Isa savings trends.

Cash Isas down, stocks and shares up

It appears cash Isas' surge in popularity was short-lived, with new data suggesting savers in 2020-21 sought to house their money elsewhere. 

Not only have the number of cash Isa subscriptions fallen, but people are also depositing less money into these accounts; in 2019-20, savers paid more than £48.7bn into their cash Isas, averaging a little over £5,000 per person. But in 2020-21, the figure had dropped to £36.8bn, with average savings per person totalling £4,500.

Meanwhile, the number of stocks and shares Isas being opened jumped from 2.7 million in the 2019-20 tax year to 3.5 million in 2020-21 - the biggest year on year increase recorded in the statistical history, which goes back to 2008-09.

People are also depositing more into their stocks and shares Isas; deposits were up by around £10bn in 2020-21, to total £33.8bn. This equates to the average saver putting almost £9,500 into their account.

Why cash Isas fell in popularity

One possible reason for cash Isas' decline in popularity is the poor interest rates on offer during this time, caused by the Bank of England cutting interest rates to the historic low of 0.1% in March 2020.

The decrease could also be, as Which? predicted last year, a result of the Help to Buy Isa closing to new customers on 30 November 2019. As these are included in the stats as cash Isas, it’s possible that the boost for 2019-20 was down to prospective first-time buyers signing up for accounts before the scheme closed.

Junior Isas - which were launched in November 2011 as a replacement for Child Trust Funds - saw a slight dip in popularity. Around 940,000 Junior Isas were opened during 2020-21, down from a million in 2019 to 2020. 

Despite fewer subscriptions, those with Junior Isas deposited more into them. Overall, £1bn was paid into Junior Isas in 2020-21, with an average subscription of £1,133, a 19% increase since 2019-20.

• Find out more: how to find the best cash Isa

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Lifetime Isa withdrawals increase

Lifetime Isas were launched in April 2017, as both an alternative to Help to Buy Isas for those looking to get on the housing ladder, and an additional way to save for retirement.

HMRC's lifetime Isa data is more up-to-date, showing figures from 2021-22. The figures show lifetime Isas being put to use by first-time buyers; 50,800 account holders withdrew savings to put towards a property in 2021-22, an increase of around 15,000 compared to the previous tax year.

The average value of withdrawal for a property purchase was £13,192, up around £700 since 2020-21.

Savers lose bonuses through 'unauthorised' withdrawals

However, the number of withdrawals for reasons other than buying a property outweighed this; HMRC recorded 77,550 'unauthorised withdrawals' in 2021-22. Unauthorised withdrawals refer to money taken out of a lifetime Isa for any reason other than buying a first home, or being used in retirement after the age of 60. 

This is significant because of the lifetime Isa's withdrawal penalty, which means savers end up losing a chunk of their own savings. 

For a year from 6 March 2020, the government temporarily lowered the withdrawal penalty to 20%, which meant savers would only lose the 25% government bonus when making withdrawals. This measure resulted in a massive spike in the number of unauthorised withdrawals in 2020-21. 

Thereafter, unauthorised withdrawals continued to increase, despite the withdrawal penalty reverting to 25% from 6 April 2021. This equates to losing the government bonus, plus 6.25% of your own money.

• Find out more: lifetime Isas - should you get one?

What are the Isa savings rules?

The Isa allowance for everyone in the UK is the same. The maximum amount you can deposit in this tax year, 2022-23, is £20,000. If you're saving for a child with a Junior Isa, you can deposit up to £9,000. This is unchanged from 2021-22.

The adult Isa allowance can all be used on one account, or split between several - as long as they are different types of Isas. In other words, you can't pay into more than one of the same type of Isa in the same tax year. 

Cash Isas, stocks and shares Isas and Innovative Finance Isas (IFISAs) will all accept the full £20,000, but you can only deposit up to £4,000 into a lifetime Isa, and up to £200 per month into a Help to Buy Isa (closed to new savers). 

If you exceed your allowance, HMRC may tell your provider to remove extra money from your account, and you may be charged tax on the interest the over-subscription earned. 

Despite these restrictions, the benefit of Isas is that the interest your money makes is tax-free, regardless of how much you earn.

• Find out more: Isa rules and allowances