ISAs 

Cash costs investors £40k

Cash costs investors £40k

Cash Isa savers have missed out on more than £40,000 in potential returns compared with those that invested in the stock market, research has claimed.

According to analysis from Scottish Friendly a decade of low interest rates has led to Cash Isa savers who maxed out their annual allowances every year earning £41, 474 less than those invested in stocks and shares. 

Since 1999, investors in stocks and shares Isas received annual returns of 2.9 per cent after inflation and fees, more than twice the 1.3 per cent achieved by cash savers, the research showed. 

It found that cash Isa holders who put away the maximum amount every year since 1999 would have an average pot of £153,191 today. 

By comparison, those that invested the maximum allowance in the FTSE All Share index via a stocks and shares Isa with average annual charges of 1.4 per cent would have accrued £194,665. 

Kevin Brown, savings specialist at Scottish Friendly, said: "When it comes to saving, the UK has a seemingly unbreakable attachment to the cash Isa. But the figures are clear – over the past 20 years savers who put their money into the stock market instead could have been thousands of pounds better off.

"That extra cash could, for example, allow you to retire earlier, help a loved one onto the housing ladder or even to fund a holiday of a lifetime.

"Cash Isas clearly have a place, but history shows us that the best returns over the years have been achieved by those who have put their money into the stock market. And that is unlikely to change while interest rates are near record lows."

The research also showed that in the 2017/18 financial year, 7.8m people opened a cash Isa compared with 2.8m that opted for a stocks and shares Isa. 

While the cash equivalent remained a popular choice, however, last year’s open rate was the lowest since 2002 when a record 12.2m people chose a cash Isa compared with 3m who opened a stocks and shares Isa. 

Martin Bamford, chartered financial planner at Informed Choice, said: "Cash is usually a bad choice as a long-term home for your money.

"The combination of low interest rates and persistent price inflation experienced over the last decade has done real damage to the buying power of cash Isas relative to stock market returns. However, investing money isn’t the right choice for everyone. 

"There are many good reasons to keep some or all of your wealth in cash, and a cash Isa is a smart move for those who need to make a tax-free cash allocation."

But he added: "It’s only possible to judge the returns from investment markets with the benefit of hindsight and, if we had not seen central bank intervention following the global financial crisis, the outcome could have looked very different today."