UK savers maxing out their cash ISA allowance every year since ISAs launched would have lost out on more than £134K in real wealth creation versus those investing in UK shares, according to analysis from trading and investing platform IG.
The huge figure – almost enough to buy the average house in Sunderland or more than three brand-new Tesla Model 3s – starkly highlights the cost of prioritising cash over investing for the long term.
IG crunched the numbers ahead of UK Chancellor Rachel Reeves’ Mansion House speech on 15th July, where she is expected to reduce the cash ISA allowance to £4,000 per year. IG’s analysis questions whether this move will be enough.
The study examined total returns for someone maxing out their annual tax-free cash ISA allowance since 1999, adjusted for inflation, then compared them to returns if the same contributions had instead been invested in the FTSE 100 through a stocks and shares ISA. Although the total contributions were the same – £252,460 over 26 years – the gap in outcomes is significant.
Over this period, the average annual cash interest rate was 2.85%, while investors who put their full allowance into the FTSE 100, reinvesting dividends, achieved an average annual return of 4.4%.
Cash ISA savers would have seen a total return of 107.8% (pre inflation), with their final balance reaching £524,692. However, accounting for inflation, this represents £275,659 in purchasing power today, amounting to just £23,199 in real wealth creation, and a total real return over the period of 9.2%.
Investors putting their money into the FTSE 100 meanwhile would have seen a total return of 206.3% (pre inflation), with their final balance reaching £773,362. Accounting for inflation, this equates to £410,051 in today’s purchasing power – £157,591 in real wealth creation and a total real return of 62.4%.
While most savers don’t max out their ISA allowance each year – IG’s analysis and the difference in real returns as a percentage holds true for those making smaller contributions each year.
IG recently launched its ‘Save our stock market’ campaign, calling on the government to take urgent action to boost the UK’s dwindling stock market and get people investing in UK companies. One of its key policy recommendations is for the Chancellor to scrap the cash ISA to encourage more UK savers to engage with investing.
Michael Healy, UK Managing Director at IG said: “Only by building a true culture of investing will UK households have the opportunity to grow real, long-term wealth. Many savers will be reluctant to take their first step, but with a long-term view, investing in the stock market should be a no-brainer.
“Since the launch of the cash ISA in 1999, the FTSE 100 has delivered negative returns in only seven years – and other global markets have performed even more strongly. In contrast, between 2008 and 2020, average cash ISA rates hovered around just 1.5%, well below inflation, which averaged 2.6%. Volatility may be uncomfortable in the short term, but the long-term erosion of purchasing power is a quieter risk that deserves a louder warning.
“There’s speculation the Chancellor may cut the tax-free allowance for cash ISAs to encourage more investing. But the time for gentle nudges is over – we need a bold reset to get Britain’s money moving. Fully scrapping the cash ISA is the only way to break the cycle and ensure savers are properly incentivised to think beyond cash and start building genuine long-term wealth.”
To mark the SOS campaign, IG is offering all new customers a free share bundle of British stocks if they open a new trading account before the 16th August.
You can read more about IG’s SOS campaign and free UK share offer here.
Investing puts your capital at risk.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.
