EQUITIES 4 minutes to read

Why choose an investment ISA over a cash ISA?

Jack Watkins

Content Manager, Saxo Bank Group

Summary:  Prudent and profitable investing is contingent upon many factors, but when it comes to ISAs three things must always be considered – duration, risk appetite and inflation.


According to Retireready from Aegon, there are three main factors to consider when deciding between a cash ISA and a stocks and shares ISA: the length of time you’ll be saving/investing, your appetite for risk, and the impact of inflation. We’ll look at these factors in more detail below and show you why an investment ISA could be a better bet for your savings.

Returns speak louder than words

If you’re saving for the long term, then stocks and shares are likely to generate a higher rate of return than cash. In fact, if you hold your investments for at least 18 years, research shows that stocks and shares will outperform cash 99% of the time.1

Other research has revealed that a £1,000 investment in an average cash ISA at the start of the 1999/2000 tax year would’ve been worth £1,162 by the end of 2016/2017 (accounting for inflation), equating to an annual growth rate of just 0.89%.2


Conversely, £1,000 invested in the UK stock market in April 1999 could have been worth £1,841 by the end of the 2016/2017 tax year (based on the FTSE All-Share Total Return Index), representing an annual growth rate of 3.66%. 
During that time we saw two stock market crashes, which just serves to highlight the relative long-term stability of performance.

Cash ISAs are not risk free

Savers have traditionally preferred cash ISAs as they offer a guaranteed return. Each comes with a payable interest rate, which, although variable, tends to deliver slow and steady growth.

However, with UK interests so low at present and inflation tottering above the 2% mark, the buying power of your cash savings is actually eroding in real terms every year. That means keeping your money in cash isn’t the risk-free option people often think it is, and it’s not a fantasy to expect interest rates to remain below inflation over the next decade.

While it’s impossible to predict how the stock market will perform, it’s important to think about how you can best utilise your ISA allowance. A stocks and shares ISA may be a slightly riskier proposition, but if you’re looking to maximise your returns long term, it could be a better alternative to cash.

Diversity is the spice of life

Stocks and shares might be the headline names within most investment ISAs, but they are far from your only option. Many providers enable you to create a diverse investment portfolio across equities, ETFs, bonds and investment trusts, as well as cash. 


Multi-asset investing not only enables you to spread your risk across various holdings, but it has also outperformed cash every year since 20093. And when these assets are held within the ISA wrapper, they are exempt from capital gains tax, and tax on further interest or dividend income received.

That said, it’s vital that your investments are suitable for your personal circumstances and the level of risk you’re comfortable with, as the higher the risk profile of your investments the more likely they are to experience significant fluctuations in value. If you’re not confident in choosing your own investments, a financial adviser can help identify your risk appetite and investments that are aligned with it.

Look to the future


Time horizon is a key consideration when choosing which ISA to invest in. Saving for retirement, for example, might mean that you’re more at ease navigating the short-term ups and downs of the stock market, knowing that your portfolio has adequate time to recover. In turn, this will 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 your long-term savings – you could be losing money in real terms – and whether an investment ISA is a better solution.


1Source: Barclays Equity Gilt Study March 2016, Figure 8 p61. 
2Source: Schroders - Cash ISA vs stock market ISA: which has returned the most?
3Source: Royal London, The Curse of Long Term Cash , as of January 2017





Find out more about Saxo’s Stocks & Shares ISA

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)