Why choose an investment ISA over a cash ISA?

According to Retireready from Aegon, there are three main factors to consider when deciding between a cash ISA and a stocks and shares ISA: the length of time you’ll be saving/investing, your appetite for risk, and the impact of inflation. We’ll look at these factors in more detail below and show you why an investment ISA could be a better bet for your savings.

Returns speak louder than words

If you’re saving for the long term, then stocks and shares are likely to generate a higher rate of return than cash. In fact, if you hold your investments for at least 18 years, research shows that stocks and shares will outperform cash 99% of the time.¹

Other research has revealed that a £1,000 investment in an average cash ISA at the start of the 1999/2000 tax year could’ve been worth £1,115 by the end of 2017/18, equating to an annual return of just 0.6%.²

Conversely, £1,000 invested in a stocks and shares ISA could have been worth £1,667 (based on the  MSCI World Total Return index), which represents an annual return of 2.9%.² That is an increase of £552 or 50% compared to the cash ISA.

When you consider during that period we experienced two stock market crashes, this serves to highlight the relative stability of long-term performance. Just make sure the amount you invest is suitable for your risk tolerance – a financial adviser can help guide you if you’re unsure.

And remember, past performance is not an indication of future performance.

Cash ISAs are not risk free

Savers have traditionally preferred cash ISAs as they offer a guaranteed return. Each comes with a payable interest rate, which, although variable, tends to deliver slow and steady growth.

However, with UK interest rates consistently low and the prevailing level of inflation hovering around the 1% mark, the buying power of your cash savings is actually eroding in real terms every year. While cash continues to not keep pace with inflation, keeping your money in cash isn’t the risk-free option people often think it is, and it’s not a fantasy to expect interest rates to remain below inflation for the foreseeable future.

While it’s impossible to predict how the stock market will perform, it’s important to think about how you can best utilise your ISA allowance. A stocks and shares ISA may be a slightly riskier proposition, but if you’re looking to maximise your returns long term, it could be a better alternative to cash.

Diversity is the spice of life

Stocks and shares might be the headline names within most investment ISAs, but they are far from your only option. Many providers enable you to create a diverse investment portfolio across equities, ETFs, bonds and investment trusts, as well as cash. 

Multi-asset investing not only enables you to spread your risk across various holdings, but it has also outperformed cash every year since 2009³. And when these assets are held within the ISA wrapper, they are exempt from capital gains tax, and tax on further interest or dividend income received.

It’s vital your investments are suitable for your personal circumstances and reflect the level of risk you’re comfortable with. The higher the risk profile of your investments, the more likely they are to experience significant fluctuations in value. Carefully selecting a diversified portfolio will help spread risk and achieve your personal aims. And if you’re not confident in choosing your own investments, a financial adviser can help identify your risk appetite and investments aligned with this.

Look to the future

Time horizon is a key consideration when choosing which ISA to invest in. Saving for retirement, for example, might mean that you’re more at ease navigating the short-term ups and downs of the stock market, knowing that your portfolio has adequate time to recover. In turn, this will have a direct impact on the amount of risk you’re willing to take on.

Perhaps it’s time to ask yourself whether you’re overly reliant on your cash ISA for your long-term savings – you could be losing money in real terms – and whether an investment ISA is a better solution.


¹Source: Barclays Equity Gilt Study March 2016, Figure 8 p61. 
²Source: Schroders - Cash ISA vs stock market ISA: which has returned the most? Mar 2019
³Source: Royal London, The Curse of Long Term Cash , as of January 2017