Why sticking to cash is hitting your long-term wealth

Lots of people stick to cash rather than investing, but it’s harming their long-term wealth. New figures from AJ Bell show that Cash ISAs have lagged the returns of stock market funds since the ISA was launched in April 1999.

The data looked at investing £1,000 a year, every April when the new tax year started, and compared it getting the average interest rate on a Cash ISA versus investing it in a variety of sectors. The figures show that £1,000 saved in a Cash ISA every year since April 1999 when the product was launched, and earning the average Cash ISA rate over that almost 26-year period, would have turned into £34,392.

That might seem like a decent return, but the money hasn’t kept up with inflation – which is the measure of rising prices. It means that your savings’ spending power has been eroded over that period, as it would have needed to rise to £38,992 just to keep pace with inflation.

In contrast, if you’d saved that same £1,000 a year but invested it instead, you’d have a far bigger pot. If the money was invested in global stock markets, earning the average return of a fund in the IA Global sector, which are funds invested in companies around the world, you would have a pot worth £83,603 after the same period – almost £50,000 more than sticking to cash.

You’d have generated even higher returns if you’d have invested in the US over the period, with the average return of funds in the IA North America sector meaning the pot would have turned into £120,660 – a whopping £86,000 more than sticking to cash. Investing in the UK would have delivered lower returns, of £59,000, but still significantly more than cash.

Source: AJ Bell/Bank of England/FE. Data from 30 April 1999 to end of December 2024. Based on a £1,000 investment every year from April 1999.

Even if we look at a smaller investment, the results still show the significant gap by sticking to cash. The figures show that £1,000 saved in a Cash ISA in April 1999 when the product was launched, and with nothing further added, earning the average Cash ISA rate over that almost 26-year period, would have turned into £2,016. Some savers might be over the moon with doubling their money, but looking at inflation growth over that time will bring them back down to earth with a bump.

Those average Cash ISA returns have barely eked out a better return than inflation – meaning savers’ money is only just outpacing rising prices. The UK government bond market tells a similar story, with that same £1,000 investment in April 1999 turning into just £27 more than the inflation increase over that period.

Looking at investment markets shows a far rosier picture, with the average return of the IA Global sector turning that same £1,000 initial investment into £4,641 – a total return of 364%. The US has delivered even more impressive returns, delivering almost six times your initial investment over that period. Even the UK market, which has been unloved in recent years, has delivered more than three times your original investment – turning £1,000 into £3,300 over that period – a 230% total return.

Source: AJ Bell/Bank of England/FE. Data from 30 April 1999 to end of December 2024. Based on one £1,000 investment in April 1999 and no further contributions.

Clearly these figures are only averages, so a savvy saver who switched their money to the top-paying Cash ISA account could have earned a higher return. But equally, someone invested in the top performing investment fund could have generated far higher returns than the average figures in this table.

Cash has a role

That’s not to say that everyone should ditch cash and bonds, as these safe havens have a key role to play in people’s investment pots. Some people prefer the security of knowing their money is safe from markets going up and down, while others need money in the short term or easy-access savings. But it shines a light on the missed wealth opportunities for those who are defaulting to cash and not taking that first step into investing. Being in cash should be a conscious decision, rather than unthinkingly hoarding it.

Right now, 14.5 million people hold a Cash ISA, while four million have a Stocks and shares ISA, according to government figures. A further 3.5 million people hold both, which is probably to be expected seeing as the Cash ISA is the first port of call before investing, to build up an emergency cash buffer. But the concern comes when we look at those with large amounts sitting in cash. Around three million people have more than £20,000 in a Cash ISA without also holding a Stocks and shares ISA, according to FCA data, and over one million of them have more than £50,000 in their Cash ISA.

When it comes to choosing between a Cash ISA and a Stocks and shares ISA, the key question is: are you saving for the short term or the long term? If you’re setting money aside for an emergency fund, typically three to six months’ worth of expenses, then a Cash ISA is a solid option. It keeps your money accessible while offering tax-free interest. But if you’re looking at medium- to long-term goals, such as saving for retirement alongside a pension, for a house deposit, home improvements in future or a career break, then a Stocks and shares ISA could be a more effective route, given that markets tend to rise over time and outperform cash, despite short-term fluctuations.

Tips for first time investors

Before investing you’ll want to make sure that you’ve paid down any pricey debt, otherwise the interest you’re racking up on your credit card or overdraft will more than wipe out the gains you make investing.

Investing is also generally only suitable for money that you don’t plan to spend for five years or more. So, make sure that you’ve got your emergency savings in cash, as well as any money you’ll need in five years – for a big holiday, a new car or your first home, for example. Any savings goal that’s further out than five years could be ideal for investing.

Investing for the first time can feel daunting, if you don’t feel confident picking which countries or sectors to invest in you can defer asset allocation decisions to a professional. You can buy so-called ‘all in one’ or multi-asset funds that spread your money between different country’s stock markets and across various asset classes, with an option of having more or less in stock markets versus bonds, gold and cash, depending on your risk appetite. Alternatively, first-timers could buy a cheap ‘tracker’ fund, which mimics the performance of a broad global index, such as the MSCI World.

Investors also need to make sure they understand what they’re buying, and why they think it will make money – whether it’s a fund or a share. All too often investors are lured in by the promise of high returns or invest because a friend has recommended it, but you need to make sure you understand how the investment works and all the risks before you commit your money.