Overcoming fear of investment and staying with cash might result in losing out on substantial amounts of money
In the current economic climate, the question of whether to invest or save has become a popular topic in the UK. Two popular options for individuals with investable assets are Stocks and Shares ISAs and Cash ISAs.
According to recent data, much of the savings in the UK are being held in cash, with 61% of people with over £10,000 in investable assets holding at least three-quarters of these assets in cash. This trend, however, may not be the best choice for long-term financial growth.
The Bank of England recently cut the Base Rate to 4%, and the savings ratio in the UK is currently at 12%, well above pre- and post-pandemic levels. This increased savings rate, combined with low-interest rates, has led to concerns about the erosion of purchasing power due to inflation.
Historically, Stocks and Shares ISAs have delivered average long-term returns around 6% annually, whereas Cash ISAs tend to yield around 2.5% or less per year. For example, investing £20,000 in a Stocks and Shares ISA over 20 years at 6% annual return could grow to about £64,000, while the same amount in cash at 2.5% growth would reach roughly £33,000.
Scepticism around investing is found to be more pronounced in women than men, and a significant knowledge gap is deterring potential investors. However, simple wealth management tools are considered vital to support investors in taking control of their future.
In contrast to Stocks and Shares ISAs, Cash ISAs offer fixed or variable interest with virtually no risk to capital, making them suitable for short-term savings (under 5 years) or very risk-averse savers. Stocks and Shares ISAs, being invested in equities and other assets, fluctuate with market conditions, so the value can go down as well as up. They are typically recommended for at least a 5-year investment horizon to ride out market volatility.
Another concern is the impact of inflation on cash savings. Cash returns often fail to keep pace with inflation, reducing purchasing power over time. Stocks and Shares ISAs have a better chance of growing real wealth over the long term by outpacing inflation.
However, Stocks and Shares ISAs usually involve management and transaction fees, which can reduce net returns. Cash ISAs tend to have fewer fees, but interest rates are generally lower. Both types of ISA shelter gains from income tax and capital gains tax, with an annual allowance of £20,000 that can be split between ISA types.
For those aged 60 and over, the cost of three years' worth of essential spending is £50,112. With current interest rates, it may be challenging for cash savings to grow enough to cover these expenses. In this case, a balanced approach, combining both ISAs, may be beneficial.
Despite the potential benefits of investing, four in 10 have not invested in the past 12 months and do not plan to do so in the future. Daniel Gold, CEO of Stratiphy, states that millions of savers are putting their retirement at risk by placing their money into poor value cash accounts. Half of people asked said they are not considering investing in the next year, and half of people think they don't have a strong enough financial understanding to manage their own investments.
In conclusion, for long-term growth, a Stocks and Shares ISA offers superior return potential but comes with higher risk and short-term volatility. A Cash ISA is safer but likely to underperform inflation and growth assets over many years, making it more suitable for short-term or risk-averse saving goals. Many investors may choose to use both ISAs within their allowance, balancing security and growth potential. It is essential to consider one's investment horizon, risk tolerance, and financial understanding before making a decision.
- Individuals who prioritize long-term financial growth might consider investing in a Stocks and Shares ISA, as they have historically delivered average returns of around 6% annually.
- The low-interest rates and high savings ratio in the UK have led to concerns about the erosion of purchasing power due to inflation, making cash savings less appealing for maintaining buying power over time.
- Cash ISAs, contrary to Stocks and Shares ISAs, offer fixed or variable interest rates with minimal risk to capital and are suitable for short-term savings or very risk-averse savers.
- For those aged 60 and over, a balanced approach, combining both ISAs, may be beneficial to ensure their savings can cover essential expenses over the long term.
