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01 April 2018

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

8 min read

 
Helen Morrissey, Personal Finance Specialist

Helen Morrissey

Personal Finance Specialist

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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, Personal Finance Specialist

Notes to editor

  1. 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.