Stocks and shares ISAs have returned £100 more than cash ISAs in the past 15 years, according to new research, but financial experts say the UK is missing out because it has a “scrimping and saving mentality”.
One expert called stocks and shares ISAs “one of the best kept secrets of finance” where “if you get the investments right, growth will follow”.
Since 2010, the average cash ISA grew £100 to £130, while around the same amount in the typical stocks and shares ISA grew to £233, meaning investors are £103 better off for every £100 invested, the research by data provider, Moneyfacts, found.
The average annual return for a cash ISA is 1.79%, while stocks and shares ISAs at 6.79% easily outpace inflation at 2.92%.
Moneyfacts says turbulent returns on stocks and shares ISAs may make them more suited for long-term growth, but returns could be damaged if the money doesn’t stay invested for long.
Caitlyn Eastell, Spokesperson at Moneyfactscompare.co.uk, said: “When it comes to building long-term wealth, investing through a Stocks & Shares ISA outperforms saving in cash.
“It proves that staying invested, despite periods of volatility, pays off. But consumers that need access to their money within the next few years may be less inclined to invest because short-term market swings may damage their returns.”
David Belle, Founder and Trader at Fink Money said he has been “banging on about” the potential for money to grow in a stocks and shares ISA “for a long time”, but said the problem is “the UK has a scrimping and saving mentality when we need a wealth mentality”.
“We critiqued Money Saving Expert’s Martin Lewis back in November about the years of instilling a scrimping and saving mindset in UK consumers and, lo and behold, just a few days ago he did a show on investing.
“The problem with Brits is we confuse risk with volatility. They aren’t the same thing. Bitcoin is volatile but has the best risk-adjusted returns of the last 15 years.”
“Best kept secret in finance”
Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, said: “This is one of the best kept secrets of finance. Most people I speak to haven’t heard of stocks and shares ISAs or instantly think of cash when you say ISAs.
“For long-term savings, where you’re looking to build up a pot, stocks and shares ISAs are great. They shield your money from income tax and dividends and you can withdraw whenever you want.
“You don’t have to fill out a self-assessment tax return for them and, if you get the investments right, growth will follow. Losses can and will happen from time to time, and that’s where having time on your side comes in. If you’re holding sensible investments, they’ll do just fine.”
Riz Malik, Director at Southend-on-Sea-based R3 Wealth, added that while cash ISAs have grown in popularity, boosted by banks’ eagerness to attract deposits, holding too much in cash can come at a cost.
He added: “Inflation erodes value over time and there’s a risk of missing out on stronger long-term growth. Think about your short, medium and long-term requirements and, if in doubt, seek independent advice.”
Beating inflation
Ross Lacey, Director & Independent Financial Adviser at Rayleigh-based Fairview Financial Management, said: “Over the longer term, we’d expect investments in company shares to grow more than leaving cash in the bank.
“The whole point behind investing rather than saving is to keep the value of your buying power. The gradual rising costs of goods and services – inflation – will eat away at the value of cash left in the bank.”
He pointed out, however, there will be times where the returns on cash are higher than what stocks and shares deliver. But because these can’t be predicted, “it’s absolutely the case of accepting periods of negative investment performance in the pursuit of better returns than cash”.
“Beware performance-chasing”
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said how long you can tie the money up for will be a key factor in deciding whether to invest in a stocks and shares ISA or stick with cash.
She continued: “For money that may be required in the near term, capital security and ready access are usually more important than chasing higher expected returns. By contrast, over multi-year periods, a diversified portfolio of growth assets has a higher expected real return than cash.”
But investors should be wary of “performance-chasing”, Wright said.
“The most recent year in markets has been highly unusual. Basing decisions on recent strong returns encourages performance-chasing, with people investing after sharp rises and then disappointed when markets correct.”
Photo by Milad Fakurian on Unsplash
