- Investors in the IA Global sector since 1999 would have made £49,211 more than the average Cash ISA return, based on a £1,000 annual investment
- Anyone investing in the average return of the IA North America sector would have £86,268 more than if they saved in cash
- Figures highlight lost wealth from sticking solely to cash
- Government ISA reform should focus on a broader package to simplify the ISA system and encourage investment
Laura Suter, director of personal finance at AJ Bell, comments:
“Savers are paying the price for sticking to safe havens, as Cash ISAs have lagged the returns of stock market funds since the ISA was launched in April 1999. While cash is currently enjoying a sweet spot of higher returns, and Cash ISA interest rates have risen this ISA season, a glance at the long-term performance of different markets shows cash is definitely not king.
“The figures show that £1,000 saved in a Cash ISA in April 1999 when the product was launched, and earning the average Cash ISA rate over that almost 26-year period, would have turned into £2,016. Some savers might be over the moon with doubling their money, but looking at inflation growth over that time will bring them back down to earth with a bump. Those average Cash ISA returns have barely eked out a better return than inflation – meaning savers’ money is only just outpacing rising prices. The UK government bond market tells a similar story, with that same £1,000 investment in April 1999 turning into just £27 more than the inflation increase over that period.
“Looking at investment markets shows a far rosier picture, with the average return of the IA Global sector turning that same £1,000 initial investment into £4,641 – a total return of 364%. The US has delivered even more impressive returns, delivering almost six times your initial investment over that period. Even the UK market, which has been unloved in recent years and seen sustained outflows, has delivered more than three times your original investment, turning £1,000 into £3,300 over that period – a 230% total return.
“Clearly these figures are only averages, so a savvy saver who switched their money to the top-paying Cash ISA account could have earned a higher return. But equally, someone invested in the top performing investment fund could have generated far higher returns than the average figures below.
“The figures are even more stark if we assume someone added £1,000 to their ISA every April since 1999, at the start of the new tax year. In this scenario, had that pot been earning the average Cash ISA rate it would have turned into £34,392. Over that period you’d have contributed £26,000 – with the remainder being interest. However, this trails inflation over that period, with the Cash ISA failing to keep up with rising prices. To keep up with inflation over that time the pot would need to have been almost £39,000 – meaning cash savers have lost out to the tune of £4,600.
“Investment returns have eclipsed that, with a pot invested in the average return of the IA North America sector since 1999 soaring to £120,660 during that period, as US markets delivered impressive total returns over that time. Likewise for global investments, which turned the £26,000 investment into £83,603 and while UK stock markets trailed those returns, they still turned the investment into £59,082 – delivering almost £25,000 of additional growth when compared to a Cash ISA.”
Cash has a role
“That’s not to say that everyone should ditch cash and bonds, as safe havens have a key role to play in people’s portfolios. Some people prefer the security of knowing their money is safe from market fluctuations, while others need short-term money or easy access savings. But it shines a light on the missed wealth opportunities for those who are defaulting to cash and not taking that first step into investing. Being in cash should be a conscious decision, rather than unthinkingly hoarding it.
“Right now, 14.5 million people hold a Cash ISA, while four million have a Stocks and Shares ISA. A further 3.5 million people hold both, which is probably to be expected seeing as the Cash ISA is the first port of call before investing, to build up an emergency cash buffer. But the concern comes when we look at those with large amounts sitting in cash. Around three million people have more than £20,000 in a Cash ISA without also holding a Stocks and Shares ISA, according to FCA data, and over one million of them have more than £50,000. Given that an emergency fund should cover around six months of expenses, that suggests these savers would need to be spending over £8,000 per month, an unlikely scenario for many.
“When it comes to choosing between a Cash ISA and a Stocks and Shares ISA, the key question is: are you saving for the short term or the long term? If you’re setting money aside for an emergency fund, typically three to six months’ worth of expenses, then a Cash ISA is a solid option. It keeps your money accessible while offering tax-free interest. But if you’re looking at medium- to long-term goals, such as saving for retirement alongside a pension, for a house deposit, home improvements in future or a career break, then a Stocks and Shares ISA could be a more effective route, given that markets tend to rise over time and outperform cash, despite short-term fluctuations.
“The Barclays Equity Gilt Study, which tracks data back to 1899, shows that over a 10-year period, UK equities have a more than nine in 10 chance of beating cash returns. The FCA flagged this issue back in 2021, estimating that 8.4 million people were holding too much cash. Instead of reducing, that number has since grown to 11.8 million.”
Tips for first-time investors
“Before investing you’ll want to make sure that you’ve paid down any pricey debt, otherwise the interest you’re racking up on your credit card or overdraft will more than wipe out the gains you make investing. Investing is also generally only suitable for money that you don’t plan to spend for five years or more. So, make sure that you’ve got your emergency savings in cash, as well as any money you’ll need in five years – for a big holiday, a new car or your first home, for example. Any savings goal that’s further out than five years could be ideal for investing.
“Investing for the first time can feel daunting, if you don’t feel confident picking which countries or sectors to invest in you can defer asset allocation decisions to a professional. You can buy so-called ‘all in one’ funds that spread your money between different country’s stock markets and across various asset classes, with an option of having more or less in stock markets versus bonds, gold and cash, depending on your risk appetite. The Vanguard LifeStrategy funds are worth looking at and investment platforms often offer their own versions too. Alternatively, first-timers could buy a cheap ‘tracker’ fund, which mimics the performance of a broad global index, such as the MSCI World. Fidelity Index World is one option for this, which has a low annual cost of 0.12%.
“Investors also need to make sure they understand what they’re buying, and why they think it will make money – whether it’s a fund or a share. All too often investors are lured in by the promise of high returns or invest because a friend has recommended it, but you need to make sure you understand how the investment works and all the risks before you commit your money.”
