Concerns have been raised as the number of people investing in cash Isas grew by 1.2m in the 2019/20 financial year, with an extra £4.8bn put into the products.
According to latest data from HMRC, published yesterday (June 8), the total amount paid into Isas rose £7bn to £75bn in the year and about £1.6bn was invested into stocks and shares Isas.
Tom Selby, senior analyst at AJ Bell, warned of "paltry returns" that could be eroded by inflation.
He said: “Those who held a significant proportion of their Isa in cash might have felt like they had dodged a bullet in March and April last year, when markets tanked as the UK entered its first lockdown.
“However, values have since recovered substantially, with the FTSE All share delivering whopping returns of 37 per cent since April 2020 – a boon those invested in cash will have missed out on.
“There is of course nothing wrong with investing in cash Isas, particularly if your time horizons are relatively short. But the returns on offer remain paltry, with the best easy access cash Isa paying just 0.46 per cent, according Moneyfacts."
He added: “Those willing to lock their money away for 5 years could get a cash Isa return of 1.21 per cent - a significant improvement but hardly exceptional given many expect inflation to return to the economy over the next 12 months. By contrast, the FTSE 100 is forecast to yield 3.8 per cent this year.”
Junior Isas saw more than 1m subscribers, an increase on the 954,000 seen in the 2018/19 financial year. Around £971m was added to Jisas in the period, around 61 per cent of which was in cash.
Holly Mackay, chief executive of Boring Money, said: “A continued cause for concern is the high amount of Junior Isas in cash – 61 per cent of money paid in last year was in cash and this is likely a result of low confidence.
"Unfortunately, confidence levels when it comes to opening an investment account remain low. Just 3 per cent of cash savers rate their confidence as nine or more out of 10 if they were asked to choose a new investment account.”
Heather Owen, financial expert at Quilter, added that with a potential 18-year time horizon, it was concerning that “cash is king”.
“While cash Jisas do generally provide returns above the rate of inflation, meaning account holders will not be losing money in real terms, they will not benefit from potentially 18 years of investment returns.
“If parents contribute the full £9,000 each year for the full 18 years, then their child has a chance of starting adult life with a pot worth a quarter of a million pounds. Not exactly loose change.”