Ten years of fully subscribed cash ISA investment would leave you with just £213k

Saving £20k per year in cash ISAs for the last ten years would have left you with just £213k, shows analysis by Bowmore Wealth Management – that’s a total return of just £13k over ten years (based on the average cash ISA interest rates over the last decade of just 1.1% – source Bank of England). 

By contrast, investing in Stocks & Shares ISAs in S&P500 would have turned your investment of £200k into £472k and if invested in the MSCI Global* index £455k. Investing the £200k in UK equities (FTSE All Share) would have left you with £278k.

Jonathan Webster-Smith, Chief Investment Officer at Bowmore says UK investors should seriously consider allocating at least some of their ISA allowance to Stocks & Shares ISAs. While Cash ISAs offers risk-free returns, allocating your full £20k allowance to it would have provided you with poor returns especially after taking into account the impact of inflation.

Jonathan Webster-Smith says: “Over the medium and long term, Cash ISAs returns just haven’t stood up to the returns from equities. That makes holding too much cash a poor use of your savings.”

“While inflation remains stubbornly above the BoE target, low returns from Cash ISAs are particularly painful for savers. They have been watching the real value of their savings erode over time. Investing in Stocks & Shares ISAs can be one way to ensure you’re not losing out.”

With inflation sitting at an average 2.9% per year over the last ten years, saving money in cash ISAs would have actually reduced your £200k to just £181k over ten years. Holding cash in a zero interest current account would have reduced that further to just £170k after ten years.

While stock prices for UK equities have underperformed against the S&P500, solid dividend payouts have been a strong incentive for investors to buy UK equities.    

Investors must diversity – valuations on US companies look stretched

While historical returns make the S&P500 look particularly attractive, valuations on US companies appear stretched. Valuations on UK and European equities are now looking far more attractive.  

Says Jonathan Webster-Smith: “Diversification, in ISA investments, as with other investment vehicles, is vital to ensure investors don’t take a hit from a single underperforming investment.”

“While US equities have had an outstanding decade, many analysts now view US equities as valued for perfection.”

“With Europe shortly to agree on significant defence and infrastructure spending, this may be the driver that starts to inject growth back in the Eurozone.”

* S&P500 Total Return (GBP), MSCI Gross Return (GBP), FTSE All Share Total Return (GBP)