Savers who have put their money into cash Isas over the past 10 years will have missed out on £100bn of pounds in returns, according to findings from Royal London.
The firm’s latest report, the Curse of Long Term Cash, found if all the money invested in cash Isas over the past decade had been invested in a multi-asset fund then it could now be worth around £360bn, instead of the £250bn currently held in cash savings accounts.
The research indicated if a saver put £1,000 into a deposit account 10 years ago then it would be worth less than £900 in today’s money.
However, if £1,000 was put into a simple multi asset fund, with a 50/50 split between global equities and bonds and an annual charge of 1 per cent, then that same cash would now be worth more than £1,500.
Steve Webb, director of policy at Royal London, pointed out the amount of money going into cash Isas over the past two years had surged in response to the government’s decision to increase Isa limits.
The former UK pensions minister said this policy is nudging people in the direction of a savings vehicle where the choice of investment is forced on the savers themselves.
The government must urgently review its savings strategy before investors lose out billions more in returns.Steve WebbWith the government cutting tax breaks on pension savings, where money is often invested across a range of assets, Royal London has warned against this policy of encouraging people to keep their cash in Isas for a long time.
Mr Webb said: “The government must urgently review its savings strategy before investors lose billions more in returns on their hard-earned savings.”
He also called on the government to reinstate a lower limit on the amount that can go into cash Isas to protect savings from being eroded by inflation.
This issue has been raised recently by a number of experts who have warned that the monthly hikes in the consumer price index could eat into savers’ cash, particularly now interest rates have slumped to record lows.
While the policy director said there are plenty of reasons to use a cash Isa for short term savings and “rainy day funds”, he said there is evidence to suggest that much of this money is being held in these accounts as part of a long-term savings strategy.
Trevor Greetham, head of multi-asset at Royal London, said holding cash is not a sensible option when interest rates are close to zero and inflation is on the rise.
“In the short run, cash is safe but in the long run it is risky,” he said, suggesting savers should switching money into a well-diversified multi asset fund to limit volatility and grow the real value of capital over time.
“Anyone with large long term cash holdings should seek advice and review their investment approach as a matter of urgency.”
Marlene Outrim, managing director of Uniq Family Wealth, said these figures are worrying, particularly because savers have been losing out for a long time due to low interest rates.
"Leaving money in cash for long periods means that not only are you not getting a great rate, but inflation eats away at it too meaning you have less spending power."
She agreed people should keep a certain amount in cash, but said any excess should go into more long-term savings and investments so it can take the ups and downs of the stock markets.
Ms Outrim pointed out that the introduction of the savings allowance means using the tax-free Isa wrapper for cash is not such a great advantage for some savers.
The financial adviser said long term savings should be put in stocks and shares investments that will offer capital growth over time.
"Increasing the Isa allowance is therefore a good move, since it means we can squirrel away more of our money for real growth."
katherine.denham@ft.com
