Savers are paying the price for sticking to safe havens, as cash ISAs have lagged the returns of stock market funds since ISAs were launched in 1999, says AJ Bell.
Analysis by the investment platform shows that £1,000 saved in a cash ISA in April 1999, earning the average cash ISA rate over a 26-year period, would have turned into £2,016.
In contrast, the average return of the IA Global sector would have turned an initial £1,000 investment into £4,641 over the same period; a return of 364%. The US has proved even more lucrative, delivering almost six times the initial investment.
Laura Suter, director of personal finance at AJ Bell, said: “These figures are only averages, so a savvy saver who switched their money to the top-paying Cash ISA account could have earned a higher return. But equally, someone invested in the top performing investment fund could have generated far higher returns than the average figures.”
Suter said the figures are even more stark if someone had added £1,000 to their ISA every April since 1999. In this example, the average cash ISA would total £34,392, with a contribution of £26,000 and the remainder interest. However, to keep up with inflation over that time period, the pot would need to have been almost £39,000, meaning cash savers have lost out to the tune of £4,600.
In contrast, a pot invested in the average return of the IA North America sector since 1999 would have soared to £120,660 during that period. Similarly, for global investments, an investment of £26,000 would have turned into £83,603, while UK stock markets would have turned the investment into £59,082.
Suter said: “That’s not to say that everyone should ditch cash and bonds, as safe havens have a key role to play in people’s portfolios. Some people prefer the security of knowing their money is safe from market fluctuations, while others need short-term money or easy access savings. But it shines a light on the missed wealth opportunities for those who are defaulting to cash and not taking that first step into investing. Being in cash should be a conscious decision, rather than unthinkingly hoarding it.”
As many as 14.5 million people hold a cash ISA, while four million have a stocks and shares ISA, and a further 3.5 million people hold both, However, Suter said the concern comes from those holding large amounts of cash.
“Around three million people have more than £20,000 in a Cash ISA without also holding a Stocks and Shares ISA, according to FCA data, and over one million of them have more than £50,000. Given that an emergency fund should cover around six months of expenses, that suggests these savers would need to be spending over £8,000 per month, an unlikely scenario for many,” added Suter.
Main image: pawel-czerwinski-ZttdEqszEjI-unsplash
