Isa savers have been increasingly piling into cash since the financial crash of 2008, despite analysis from Schroders showing the stock market has raced ahead of cash returns since Isas were first introduced.
The fund group found the FTSE All-Share had outperformed average cash savings rates by 38 per cent since the birth of Isas in April 1999.
Despite the strong performance of shares over the years, data from HM Revenue & Customs showed the popularity of cash Isas now dwarfs that of stocks and shares Isas.
In the 2015 to 2016 tax year, 80 per cent of the 12.5 million Isa savers subscribed to cash accounts, while just 20 per cent opened stocks and shares Isas, which is the lowest proportion seen since 2007 to 2008.
While the number of people invested in stocks and shares Isas has gradually fallen since the global recession, the FTSE All-Share has moved upwards.
People need to accept that history won’t necessarily be repeated.James RainbowWhen looking at averages for the past five years, figures show that 72 per cent of Isa accounts were cash, which compares to 57 per cent in the first five years of the Isa.
James Rainbow, co-head of the UK intermediary business at Schroders, said it is understandable that more people prefer savings over investment given the stock market turmoil during the financial crisis is still fresh in people’s memory.
But he urged savers to start investing, particularly now millions of people will face a fresh squeeze between inflation and record low interest rates.
Last week, data from the Office for National Statistics revealed the consumer price index, which is the UK’s measure of inflation, had surged to 2.3 per cent, overshooting the Bank of England’s 2 per cent target.
Mr Rainbow warned inflation could hit 3 per cent this year, which could therefore erode the real value of cash.
He said investing in the stock market can help make sure savers stay ahead of inflation, as invested companies can increase prices to make sure their profits keep rising.
“People need to be comfortable with the fact that there will be ups and downs along the way and accept that history won’t necessarily be repeated,” the Schroders’ intermediary boss said.
“But to me, it seems a simple choice: if you are willing to tie up your money for long periods, history suggests that the stock market could be the best home for your money.”
However Danny Cox, chartered financial planner at Hargreaves Lansdown, said subscriptions to stocks and shares Isas compared to cash Isas has been “reasonably consistent” since the financial crisis.
Looking at value, he said those subscribed to stocks and shares in the same period had more than doubled to more than £21bn.
“We have seen investor confidence returning somewhat over the past couple of months,” Mr Cox said.
“What is clear is that investors value the tax benefits of Isas, which are set to ramp up further with the introduction of the Lifetime Isa and the overall allowance increasing to £20,000 in April.
The financial planner also said it has never been more important for savers to take on investment risk with some of their cash, particularly when interest rates have been near rock-bottom over the past eight years.
katherine.denham@ft.com
