Are you losing money in cash ISAs?

A recent report reveals the true scale of losses people who keep their long-term savings in cash ISAs have suffered, compared with those taking a more diversified investment approach.

A recent report by Royal London highlights the fact that many people are using cash ISAs for their long-term savings, building up significant cash sums by adding to them year-on-year. And, the report suggests, they could be losing out substantially as a result. This highlights the dangers of holding long-term savings in cash.

£1,000 now worth just £910

The problem stems from the fact that although inflation has been low for some time, the cost of goods and services is still rising faster than the very low returns being paid on cash accounts (on average less than 1% each year since 2010). This means that although cash does slowly grow in these accounts, its buying power has been – and continues to be – gradually eroded. The report estimates that funds in cash ISAs have lost more than 9% of their purchasing power over the last 10 years. In other words, if £1,000 had been deposited in a cash ISA ten years ago it would now be worth less than £910 in real terms.

What are the alternatives?

People are often reluctant to put their savings into more complex investments like stocks and shares, seeing this as too risky. However, the report specifically compares investment in a cash ISA with investment in a ‘multi-asset fund’, which spreads your savings across a broad range of investments. The idea is that while some of your investments may drop in value during a particular period, others may do well, balancing out the overall returns over time. So while the value of multi-asset funds can fluctuate, they don’t tend to experience the very high volatility that can hit riskier investments. The research shows that multi-asset funds have consistently outperformed cash deposits since 2008, making them more attractive for long-term savings.

£1,000 could now be worth £1,300

The report estimates that if the £1,000 mentioned earlier had been placed in a multi-asset fund rather than a cash ISA, its purchasing power could have increased by more than 30% in real terms. In other words, if you had invested your £1,000 in a multi-asset investment fund ten years ago, it could be worth more than £1,300 in today’s values.

So, while it may still be wise to maintain some emergency savings in a cash account, you might consider placing your long-term savings in a well-managed and diversified multi-asset fund. There is a wide range of funds from which to choose, but not all are expected to deliver better returns than cash ISAs.

You could consider multi-asset funds that are constructed and managed to deliver consistent and anticipated customer outcomes within an entirely appropriate risk framework, thereby delivering customer expectations over the long term without causing sleepless nights along the way. To ensure that any funds you invest in reflect a suitable level of risk, and that they are aligned to your individual needs and circumstances, it’s important to seek professional financial advice before investing.

The value of your investments can go down as well as up, so you could get back less than you invested.