Cash ISA savers £259k worse off as money experts urge switch | Personal Finance | Finance
Cash ISA savers have been warned they are missing out on as much as £259,000 by putting their money into Cash ISAs instead of Stocks and Shares ISAs. Cash ISAs have been the subject of much scrutiny and rumour in the past few months, with fears that Chancellor Rachel Reeves was set to cut Cash ISA limits in order to encourage more people to invest in Stocks and Shares ISAs instead.
For now, ISA limits for both types have been left unchanged at £20,000, meaning savers can collectively deposit that amount this year and in the next tax year from April across all their ISAs without paying any tax on the interest generated, although it’s possible changes could still come in the Budget later this year.
But a financial expert has warned that those who use Cash ISAs to save their money rather than investment based Stocks and Shares ISAs are actually potentially missing out on hundreds of thousands of pounds.
Analysis by Bowmore Wealth Management has found that saving the maximum £20,000 per year in Cash ISAs for the last 10 years would have left you with £213,000 right now; a return of £13,000 extra based on average ISA interest rates of 1.1%, according to the Bank of England data.
But saving the same £20,000 a year into a Stocks and Shares ISA would have seen your money grow to £472,000 on average if you invested in US equities, or £455,000 for global equities.
That means you’d be a staggering £259,000 better off if you invested the money in US equities in a Stocks and Shares ISA rather than using a Cash ISA.
Jonathan Webster-Smith, Chief Investment Officer at Bowmore, says UK savers should seriously consider allocating at least some of their ISA allowance to Stocks & Shares ISAs. While Cash ISAs offers risk-free returns, allocating your full £20,000 allowance to it would have provided you with poor returns especially after taking into account the impact of inflation.
Jonathan Webster-Smith says: “Over the medium and long term, Cash ISAs returns just haven’t stood up to the returns from equities. That makes holding too much cash a poor use of your savings.
“While inflation remains stubbornly above the BoE target, low returns from Cash ISAs are particularly painful for savers. They have been watching the real value of their savings erode over time. Investing in Stocks & Shares ISAs can be one way to ensure you’re not losing out.”
With inflation sitting at an average 2.9% per year over the last 10 years, saving money in Cash ISAs would have actually reduced your £200,000 to just £181,000 over 10 years once inflation is accounted for. Holding cash in a zero interest current account would have reduced that further to just £170,000 after 10 years.
While stock prices for UK equities have underperformed against the S&P500, solid dividend payouts have been a strong incentive for investors to buy UK equities.
He added that European funds in particular look set to grow well in the next decade.
Jonathan Webster-Smith added: “Diversification, in ISA investments, as with other investment vehicles, is vital to ensure investors don’t take a hit from a single underperforming investment.
“While US equities have had an outstanding decade, many analysts now view US equities as valued for perfection.
“With Europe shortly to agree on significant defence and infrastructure spending, this may be the driver that starts to inject growth back in the Eurozone.”
