If you've yet to use up your tax-free allowance for this year – or are starting to think about next year's – you may be torn between keeping your money in a cash ISA or investing it in stocks and shares. New research from Schroders may help you make your decision.
According to the research, your decision may well come down to whether you prefer stability or are happy to cope with a bit of uncertainty for the chance of higher returns. The data shows that investing has in the past provided far higher returns, but that cash has been more stable, so much of it could come down to your risk appetite.
However, some may be surprised at just how much of a difference there's been between the two, which could make stocks and shares ISAs slightly more appealing. Indeed, saving money into a cash ISA over the last 18 years would have returned four times less than had the same amount been invested in a stocks and shares ISA. Since 2009 it could even have lost you money in real terms, thanks to falling savings rates and rising inflation.
But there's of course a trade-off with that, as the figures went on to reveal that stocks and shares returns, while higher, have also been more volatile, with numerous falls and rises over the years. This means they may not be suitable for everyone, with cash providing a far more stable base.
The report explained that the combination of low interest rates and high inflation would have eroded the value of savings held in a cash ISA, while higher – if volatile – stock market performance would have seen investments in shares grow over the same time period.
Their calculations show that £1,000 put into the average cash ISA at the start of the 1999/2000 tax year would have been worth £1,162 by the end of 2016/2017 (once inflation has been taken into account), equating to an annual rate of growth of just 0.89%.
Conversely, the same £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), marking an annual growth rate of 3.66%. This time period includes two stock market crashes, too, highlighting the long-term performance of investing.
Despite this, many savers remain reluctant to invest in these savings vehicles, with people consistently putting more money into cash ISAs over the years. Indeed, there have only been two tax years since ISAs were first launched where more money has gone into stocks and shares than cash; in the most recent tax year (2016/17), 75% of contributions were made in cash, despite record low savings rates prevailing.
"The data suggests investors are still nervous about investing following two market collapses in the first decade of the century," said James Rainbow, co-head of UK Intermediary Business at Schroders. "It is hard to blame them; it has been a tumultuous start to the new millennium. Keeping your investment in cash at least prevents the investor from having to endure the emotional rollercoaster ride that comes with stock market fluctuations.
"However, it is a state of mind. Cash is effectively a false safety net in times of ultra-low rates because of the corrosive effect of inflation on purchasing power. Providing investors take a long-term approach, usually more than five years, the stock market has historically provided a better rate of return."
There are of course pros and cons to each potential home for your money. Saving your money in cash may provide more reassurance – even more so with the £85,000 FSCS protection – but the returns could be far lower, particularly in the current environment.
Stocks and shares ISAs, on the other hand, have the potential for higher returns but come with the added risk that you could lose all your money, though they still come with FSCS protection should the provider go bust (albeit up to a lesser limit of £50,000). Just remember that past performance is no indicator of future returns, and that diversifying your investments can often be your best bet.
It all comes down to how much risk you want to take with your cash, and if you're considering investing in stocks and shares, it's worth talking to a financial adviser who'll be able to offer additional support.
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