Cash ISAs vs Stocks & Shares ISAs: What You Might Be Missing Out On

Individual Saving Account (ISA)

There are four types of ISAs: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA. These are attractive savings tools because they allow you to save or invest up to £20,000 each year without paying tax on the interest, income, or capital gains earned. This makes it a highly tax-efficient way to grow your money, whether you're saving in cash or investing in stocks, bonds, or alternative options, and you can split this allowance across multiple ISAs.

The Popularity of Cash ISAs

Source: www.gov.uk

The majority of ISAs are held in cash, primarily because of the perceived safety and the guarantee of not losing your money. A Cash ISA provides a tax-free way to earn interest, but in a low-interest-rate environment, the returns are typically underwhelming and rarely keep up with the pace of inflation. As such, the real spending value of your money is eroded over time.

What does this mean? Over the last decade, the average interest rate on a Cash ISA has hovered between 0.5% and 2.5% per year. At first glance, that might seem like a stable option. However, inflation—averaging around 3% annually—erodes the real value of your savings over time meaning your 0.5% to 2.5% interest is actually resulting in a -0.5% to -2.5% decrease in spending power.

Mind the Gap: Real Cash ISA Returns the Lowest in a Decade (2011-2022)

Source: ONS, Bank of England

Stocks & Shares ISAs: The Potential for Higher Returns

In contrast, Stocks & Shares ISAs offer the potential for much higher returns. Historically, the stock market has returned, after accounting for inflation, 4.9% per year on average. While no investment is guaranteed, this insight is calculated over the last 122 years!

Real Investment Returns by Asset Class (% pa)

* Entire sample

Source: Barclays Research

Comparing the Numbers: Cash ISA vs Stocks & Shares ISA

Let’s look at what this means for someone with £200,000 in savings, comparing the impact of investing in a Cash ISA versus a Stocks & Shares ISA over 20 and 30 years.

Scenario 1: £200,000 invested for 15 years

• Cash ISA: Assuming an average interest rate of 2.5%, your £200,000 would grow to £296,639 after 15 years.

• Stocks & Shares ISA: With an average annual return of 6%, the same £200,000 could grow to £479,312 over the same period.

Scenario 2: £200,000 invested for 30 years

• Cash ISA: Assuming an average interest rate of 2.5%, your £200,000 would grow to £419,132 after 20 years.

• Stocks & Shares ISA: With an average annual return of 6%, the same £200,000 could grow to £1,148,698 over the same period.

The difference in potential growth is staggering. In both scenarios, the decision to invest in a Stocks & Shares ISA over a Cash ISA could lead to significantly higher wealth accumulation in the long term. However, it is important to consider the risk and volatility to secure your portfolio.

The Risk vs. Reward Dilemma

Investing in the stock market comes with risks. Unlike a Cash ISA, where your capital is guaranteed, a Stocks & Shares ISA can fluctuate in value, especially in the short term. However, as history shows, those who stay invested in a diversified portfolio for the long term tend to see substantial returns.

What Does This Mean for You?

No matter what amount of savings you have—whether it's £10,000 or £1,000,000, or more—it’s worth considering the long-term impact of your decision.

While Cash ISAs may offer stability and peace of mind, they are unlikely to outpace inflation. In contrast, Stocks & Shares ISAs present the opportunity for real growth, albeit with some short-term ups and downs.

For those with long-term financial goals, such as retirement or leaving a legacy, a balanced portfolio within a Stocks & Shares ISA could offer far greater financial security over time.

For many, the right choice may not be an either-or decision but a balance between the two. Holding some cash for short-term needs and liquidity while investing in stocks for long-term growth might be the optimal strategy.

Thank you for reading! If you’re unsure of how to balance risk and reward in your ISA, or if you’re looking to maximise your long-term savings, feel free to reach out for personalised advice.