01 April 2018

Attachment to cash costs investors dear as stocks and shares ISAs continue to outperform

8 min read

Helen Morrissey

Corporate PR Specialist – Long Term Savings

Investors remaining in cash long term continue to risk poor returns and loss in purchasing power in comparison to investing in the stock market according to new analysis from Royal London.

The warning comes after recently updated figures from HMRC¹ show that at the end of the 2016/17 tax year the value of adult ISA holdings stood at £585 billion – a 10% increase compared to the value at the end of 2015-16. However, this was driven by a 20% increase in the market value of funds held in stocks and shares. ISA holdings are split almost equally between cash ISAs (46%) and stocks and shares ISAs (54%).

Royal London analysis shows that not only are cash returns lagging behind those to be found in the stock market over the last year but over the long term cash returns do not keep pace with inflation and erode purchasing power over time. Royal London figures show that holders of cash ISAs have experienced an 11.5% cut in terms of what they can purchase with their money since 2006/07.

On the other hand those investing an equivalent amount in a simple multi asset fund would have increased the value of their money by almost 48% over the same period. Multi asset funds invest in a wide range of different asset classes. This approach has benefits in that if one asset class performs less well then this can be offset by better performance in the other asset classes.

Helen Morrissey, Personal Finance Specialist at Royal London said:

"It is understandable that people will want to keep money in cash ISAs where they can access it easily but they need to be aware that returns from cash are not currently keeping up with inflation and could erode purchasing power over the long term. If people are looking to generate decent returns over the long term they will need to look at investing in a wider range of asset classes. Our analysis shows that cash ISA investors have missed out on a whopping £181m in returns compared to multi asset investors since 2006/07."

Cash ISA example, earning interest on cash

Tax Year	Holding at start of the tax year	Amounts subscribed	Market value after interest on cash	Implied withdrawal	Holding at the end of tax year
2006/07	107,571	22,677	136,195	- 12,250	123,945
2007/08	123,945	25,261	157,487	- 18,393	139,094
2008/09	139,094	30,383	176,651	- 18,404	158,247
2009/10	158,247	31,437	190,792	- 18,462	172,330
2010/11	172,330	38,197	211,624	- 11,262	200,362
2011/12	200,362	37,222	239,079	- 40,192	198,887
2012/13	198,887	40,901	241,040	- 20,476	220,564
2013/14	220,564	38,821	260,569	- 32,110	228,459
2014/15	228,459	60,951	290,702	- 53,277	237,425
2015/16	237,425	58,694	297,478	- 28,560	268,918
2016/17	268,918	39,191	309,167	- 38,971	270,196
				Change of Purchasing Power (£ million)	-34,979
				Change of Purchasing Power (%)	-11.5%

Equivalent amount invested to exactly keep pace with inflation

Tax Year	Holding at start of the tax year	Amounts subscribed	Market value if kept up with inflation	Implied withdrawal	Holding at the end of tax year
2006/07	107,571	22,677	135,980	- 12,250	123,730
2007/08	123,730	25,261	154,128	- 18,393	135,735
2008/09	135,735	30,383	165,549	- 18,404	147,145
2009/10	147,145	31,437	185,828	- 18,462	167,366
2010/11	167,366	38,197	215,532	- 11,262	204,270
2011/12	204,270	37,222	249,449	- 40,192	209,257
2012/13	209,257	40,901	257,694	- 20,476	237,217
2013/14	237,217	38,821	282,333	- 32,110	250,222
2014/15	250,222	60,951	313,707	- 53,277	260,430
2015/16	260,430	58,694	323,632	- 28,560	295,072
2016/17	295,072	39,191	344,146	- 38,971	305,175

Equivalent amount invested in a simple multi asset fund

Tax Year	Holding at start of the tax year	Amounts subscribed	Market value after investment return	Implied withdrawal	Holding at the end of tax year
2006/07	107,571	22,677	130,931	- 12,250	118,681
2007/08	118,681	25,261	145,048	- 18,393	126,656
2008/09	126,656	30,383	148,419	- 18,404	130,015
2009/10	130,015	31,437	191,119	- 18,462	172,657
2010/11	172,657	38,197	222,158	- 11,262	210,895
2011/12	210,895	37,222	265,622	- 40,192	225,430
2012/13	225,430	40,901	293,109	- 20,476	272,632
2013/14	272,632	38,821	317,800	- 32,110	285,690
2014/15	285,690	60,951	398,189	- 53,277	344,913
2015/16	344,913	58,694	407,306	- 28,560	378,746
2016/17	378,746	39,191	490,437	- 38,971	451,466
				Change of Purchasing Power (£ million)	146,291
				Change of Purchasing Power (%)	47.9%

Gains over Cash ISA (£million) £181,270

Source: Royal London, DataStream, HMRC Individual Savings Account Statistics. Multi Asset fund returns are simulated based on a fund invested 50% into global stocks, 50% into bonds with 1% fee p.a. Numbers in £millions.

Past performance is not a guide to the future.

- ENDS -

For further information please contact:

Helen Morrissey, Corporate PR Specialist – Long Term Savings

Email: helen.morrissey@royallondon.com
Tel: 0203 272 5433
Mob: 07919 170 712

Notes to editor

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/687060/Full_Statistics_Release_August_2017.pdf

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.