Why choose an investment ISA over a cash ISA
The amount of money squirreled away in low-interest cash ISA accounts is costing the UK dearly. According to Royal London, the pensions provider, over the past decade, money in cash ISAs has lost roughly 9 percent1 of its purchasing power. By contrast, an equivalent amount invested via a multi-asset fund would have grown by more than 30 percent1.
Despite this, the vast majority of ISA subscriptions made each year continue to go straight into cash – UK savers subscribed nearly £60 billion in the last tax year, compared to the £21 billion that found its way into investment ISAs2.
Over the past decade, money in cash ISAs has lost roughly 9 percent of its purchasing power.
Investing in a cash ISA is not risk free
There are a number of factors driving the cash ISA preference. It has partly to do with perceptions of risk. Many savers prefer the large probability of a small loss in a cash ISA, to the smaller probability of a large loss in an investment product. The investment ISA route also requires research and an ultimate decision, something many people feel ill-equipped to undertake.
Whilst it remains impossible to predict what stock markets will do over a given period of time, it is important for savers and investors to understand that investing in a cash ISA is not risk free. For example, it is perfectly reasonable to expect below-inflation interest rates on cash to be a hallmark of the next decade.
Multi-asset investing – the consistent outperformer
With this in mind, investment ISAs, such as stocks and shares ISAs, are increasingly seen as an alternative for investors as they diversify risk across various holdings, including cash holdings. Multi-asset investing has outperformed cash returns every year since 20093. It’s also worth considering that, unlike with cash holdings, there is no tax on any capital gains from buying and selling investments, nor on any bond interest, or dividend income received.
Choose the right ISA for your time horizon
Time horizon is also a key consideration. Saving for retirement, for example, might mean that you’re more at ease navigating the short-term ups and downs of the market, knowing that your portfolio has adequate time to recover. This will, in turn, have a direct impact on the amount of risk you’re willing to take on.
Perhaps it’s time to ask yourself whether you’re overly reliant on your cash ISA for long-term savings goals – you could be losing money in real terms.