The amount of money held in cash Isas has fallen by a third in a year, thanks in part to the introduction of the personal savings allowance, government data has revealed.
Where cash Isa holders paid £58.7bn into their accounts in the 2015 to 2016 financial year, in 2016 to 2017 they paid in just £39.2bn.
A total of 1.6 million fewer accounts were started last year than in the previous one.
Industry experts suggested that the changes were partly due to the introduction of a £1,000 personal savings allowance that basic-rate taxpayers can earn in interest before paying cash, as well as to historically low interest rates. Higher rate taxpayers can earn £500 each.
“With such a framework in place, there is little need to rush out an eagerly open a cash Isa account before the tax year end,” said Jason Hollands, managing director of Tilney, while Sir Steve Webb, director of policy at Royal London, said "the shine has come off cash Isas."
Sir Steve said: “Whilst keeping a small amount of money in cash for emergencies or a rainy day makes good sense, holding large amounts of money in a cash Isa for the long-term can seriously damage your wealth.
"Low Isa interest rates coupled with rising inflation means 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."
>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.---Steve Webb
However, the news comes at a time in which savings in general have plummeted, due in part to inflation and partly to policies such as an abundance of cheap credit encouraging consumer spending.
The Household Savings Ratio, which looks at how much of our income we save, is at an all-time record low of 1.7 per cent.
However, the number of stocks and shares Isas taken out rose slightly in the same period, the data from HM Revenue & Customs revealed, and the amount invested into stocks and shares Isas in total has bypassed the amount in cash Isas for the first time ever, leading some to say that the British were prepared to take more risk with their savings.
“Consumers are taking a more long-term outlook when it comes to savings,” said Carol Knight, chief operations officer at the Tax Incentivised Savings Association (Tisa).
Others believe there is further to go to convince the public of the merits of investing.
James de Sausmarez, director and head of investment trusts at Janus Henderson Investors, said: “British savers are a very conservative bunch, falling back on cash savings because they perceive them to be safer, despite cash abjectly failing to meet their own stated investment aims.
"The fund management industry must take partial responsibility. It is up to us to help inform savers how the products we offer, like investment trusts, are far more suited to their investment objectives.”