Cash ISAs are the most popular investment vehicle in the UK – around 46% of British adults have one (and I’m in that number!). Folks pop a little spare money inside these accounts and get a guaranteed return. I hear you ask: what could be wrong with that?
Well, quite a lot actually. When you dig into the actual numbers investors have achieved with a Cash ISA – and especially when you compare that performance against inflation – you can see that savers might be leaving tons of money on the table. This could be a huge financial mistake for a certain type of investor. Let me explain.
Magnifying glass
An article by investment broker Hargreaves Lansdown took a magnifying glass to ISA accounts over the 25-year period between 1999 and 2024. The findings? Investors putting £1,000 into a Cash ISA back when Britney Spears was first topping the charts would have seen the cash increase to £1,797.25 (and up to 2026, around £1,950).
An 80% return sounds decent for an account with no risk, right? For those who want maximum safety, then sure. This is the advantage of the Cash ISA: no chance of losing any money. I use mine for a rainy day fund, for example.
Here’s the problem for those looking to use it to grow wealth: inflation. A sum of £1,000 in 1999 was worth £1,856 by 2024. In real terms, the Cash ISA was losing about £2 a year. Crikey.
The obvious comparison here is to the Stocks and Shares ISA. How might this stock market investing account have got on? With a global tracker fund (kind of like simulating owning a piece of all stocks worldwide) the return was £4,271 – much higher than both inflation and the Cash ISA.
While there are no guarantees with this type of account – stocks go down as well as up – there is also the chance to beat the average return.
Another option
One popular approach is to add investment funds to a Stocks and Shares ISA. These offer the diversification of a tracker or index fund but can be more specialised on a sector, country, or type of investment. One that I own and think may be worth considering is Scottish Mortgage Investment Trust (LSE: SMT), which specialises in exciting growth companies.
Over the years, the fund has picked huge winners like Nvidia and Tesla ahead of time. Its most intriguing holding today is perhaps SpaceX, which is set to IPO in a couple of months. This fund also offers the chance to invest in private companies not on the markets, such as the aforementioned SpaceX and TikTok-owner ByteDance.
It’s worth saying that tech has had a particularly good run in the last 10 to 15 years. A slowdown in the sector or a downturn in the global economy could make this fund not such a great investment in the years to come.
But comparing its performance over the above 1999 to 2024 timeframe shows how good a track record it has. A £1,000 stake would have turned into £10,214. That’s one more reason a Stocks and Shares ISA may be worth thinking about compared to a Cash ISA.
