The new policy paper The Curse of Long Term Cash, shows that if the money invested in Cash ISAs in the last decade had been invested in a multi asset fund it could now be worth around £360 billion, compared with the £250 billion currently held in Cash ISAs. Savers have missed out on over £100 billion in returns by using cash as a long term investment strategy.
The report highlights the fact that the government has been cutting tax breaks on pension saving – money which is often invested across a range of assets by default – while boosting tax breaks on all types of ISA, including cash ISAs. This policy is nudging people in the direction of a savings vehicle that forces the choice of investment onto the savers themselves. While there are plenty of reasons to use a Cash ISA for short term saving and rainy day funds, the report finds evidence that much of this money is being held for the long term.
With interest rates persistently below the rate of inflation in recent years, holding cash has caused a real term erosion in capital, year after year. With high street banks offering Cash ISA rates as low as 0.1% or less, while inflation has reached 1.6% and is forecast to rise in 2017, there is every reason to think that this problem will continue. While a multi asset fund spreading exposure across equities, bonds and property can suffer from greater day to day or year to year fluctuations, these asset classes have historically offered higher returns than cash and are more appropriate for long term investment.
Other key findings highlighted in the research are:
Between 2013/14 and 2015/16, the amount invested per year in cash ISAs soared from just under £40 billion to nearly £60 billion, an increase of just over 50% in two years; new investment in stocks and shares ISAs rose by just 16% to around £21 billion;
Among those whose ISA holdings are exclusively in cash, over three million people had balances of more than £30,000 in 2015/16; as this is in excess of the average annual wage in the UK, this suggests that these are more than short term ‘rainy day’ savings and represent a long term investment for growing numbers of people;
Of the £518 billion invested in ISAs, nearly half (48%) is now held in cash;
The annual limit for contributions into cash ISAs has been increased dramatically by successive governments; in 2007/08 the limit was just £3,000 for Cash ISAs; by 2016/17 savers could put all of their £15,240 ISA allowance into cash and in 2017/18 savers will be able to put £20,000 per year into a Cash ISA if they wish; by contrast, the annual limit for pension saving has fallen from £225,000 to £40,000 over the same period;
In every single year since the financial crash of 2008, a multi asset approach would have outperformed holding cash.
Commenting, Trevor Greetham, Head of Multi Asset at Royal London said: “ISAs are increasingly being used as part of a long term savings strategy alongside pensions, but holding cash is not a sensible option when interest rates are close to zero and inflation is on the rise. In the short run, cash is safe but in the long run it is risky. Switching your money into a well-diversified multi asset fund limits volatility and should grow the real value of your capital over time. Anyone with large long term cash holdings should seek advice and review their investment approach as a matter of urgency.”
Steve Webb, Director of Policy at Royal London said: “The amount of money going into cash ISAs in the last two years has surged in response to the big increases in ISA limits, with more to come next year. The government should reinstate a separate and lower limit on the amount that can go into Cash ISAs to protect investors from the risk of seeing their savings eroded by inflation. The government must urgently review its savings strategy before investors lose out billions more in returns on their hard-earned savings.”
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