Investors continue to favour cash Isas over their stock and shares equivalents despite most of them giving negative real returns after inflation.
HM Revenue & Customs statistics point to huge flows into cash Isas with aggregate figures for 2014/15 and 2015/16 showing around £120bn invested into cash Isas.
This compared with just £43bn into stocks and shares Isas.
The surge in flows into cash followed a large increase in the limits for cash Isa investing in July 2014, with a previous annual cap on cash investing of £5,760 raised to £15,000.
But a recent Royal London policy paper, called the Curse of Long-Term Cash, found investors lost £100bn in returns over the past decade by investing in cash Isas rather than in a diversified stocks and shares equivalent.
Commenting on the HMRC figures Helen Morrissey, personal finance specialist at Royal London, said: "Saving in cash clearly has a part to play for short-term emergencies and rainy day savings. But a combination of low interest rates and rising inflation means that money in a cash Isa is losing spending power, year after year."
The HMRC data also showed lower income investors were more likely to favour cash.
In 2014/15 all income groups under £30,000 per year were more likely to hold their Isa savings in cash only products while the reverse was true for those earning more than £30,000 per year.
Younger people are particularly likely to hold money in cash, and of the £971m subscribed into Isas by the under 25s, £927m went into cash – by far the highest proportion of any age group.
Tom Selby, senior analyst AJ Bell, said: “With many cash Isas offering interest rates below 1 per cent, investors are effectively locking in to guaranteed annual losses. These losses look set to grow if, as expected, inflation continues its march upwards in 2017.
“Anyone with a large amount invested in cash Isas at rock-bottom rates should therefore consider, with their adviser, reassessing the balance of their portfolio and their appetite for risk.
"A balanced stocks and shares Isa provides the opportunity to protect against inflation eroding the value of a person’s savings, although investors need to go in with their eyes open and be prepared to withstand the undulations of the market in the short-term."
But Darius McDermott, managing director of Chelsea Financial Services warned: "Equity markets in the developed economies led by the United States are reasonably elevated.
"It is hard to look at any global stock market which is good value right now but there are other less risky investments you can make in a stocks and shares ISA which will produce better returns over the long term than the paltry rates you can get on a cash ISA."
IFA Chris Daems, director, Cervello Financial Planning, agreed on the uncertain outlook.
"We believe that attempting to time the market isn't the wisest course of action. However investing for the longer term in assets with greater potential growth in cash is usually sensible. The reality of the current political and economic environment is that it does impact the decisions we all make financially...and often not in our own best interests."
stephanie.hawthorne@ft.com
