Almost 10m people in the UK have a Cash ISA, more than double the 4.1m that hold a Stocks and Shares ISA. Both products offer users total protection from tax, while they also have generous annual cotribution allowances of £20,000.
The ease and security of the cash product make this hugely popular with Brits. But can prioritising savings over investing be a catastrophic mistake for targeting retirement wealth? Let’s take a look.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Cash vs stocks ISAs
One of the big benefits of the Cash ISA is peace of mind. I know that £20k parked in my account is totally safe — even if the bank or building society goes bust, I’ll be able to claim my capital back through the Financial Services Compensation Scheme (FSCS).
I also know I’ll receive some kind of positive return on my cash, whether on a fixed or variable rate. With the Stocks and Shares ISA there are no such assurances. Share prices can go down as well as up, affecting my capital. Dividends are never guaranteed, meaning uncertainty over how much passive income I’ll get. It’s also possible I could lose all the capital I hold in a share if it goes bust.
So why do I put almost all my extra cash in the stocks market and not a savings account? Have I gone mad?
Want bigger returns?
Not at all. Well, at least I hope not. My view is that not prioritising the investing ISA would be an act of insanity.
The reason? Over time, Cash ISAs have provided a pretty terrible return compared with investing in the stock market. So much so, in fact, that I feel it could cost me the chance of a comfortable retirement if I’m not careful.
The Cash ISA has delivered an average annual return of 1.21% over the last 10 years, according to Moneyfacts. For the Stocks and Shares ISA, it’s 9.64%. This means £20,000 invested at the start of the period would be worth:
- £22,571 in the cash product, or
- £52,242 in the shares product.
Spread that over a longer time period to accelerate compounding, and add in an extra regular monthly investment, and the differences are even larger. This is why I hold around 80% of my portfolio in equities, and the remainder in cash to balance reward and risk.
Here’s my secret weapon
There’s another powerful weapon investors like me have in their arsenal: diversification. The range of shares, trusts, and tracker funds I have to choose from is larger than ever before, enabling me to spread risk even further in my shares ISA.
Take the iShares FTSE 250 ETF (LSE:MIDD). As the name suggests, it provides exposure to all the members of the FTSE 250 UK share index. So investors get access to a wide range of industries and regions (less than 50% of the index’s total profits come just from Britain).
During the last decade, the average annual return here is 5.2%. It means someone could have made three to four times as much profit with this tracker as they would have in a Cash ISA.
The question is, can this iShares product keep outperforming? It might disappoint if broader interest in the UK stock market weakens. Yet it’s soaring right now, up 14.7% over the last year. And it could continue to do so as global investors hunt for quality underpriced shares.
