Savers sacrificing returns by sticking to cash ISAs
That’s the conclusion of new research from Janus Henderson, which noted that the typical household with a cash ISA has £11,600 saved but has received a paltry return of just £47.85 in interest over the last year. That’s equivalent to tax relief of just £9.57.
The firm pointed out that at the end of 2020 a whopping £297bn was held in cash ISAs, a near record high. This has coincided with interest rates dropping to record lows off the back of the pandemic, with choice also plummeting.
Indeed, just £1.22bn will be paid in interest in total to cash ISA holders, the lowest figure since 2000.
Some providers are looking beyond interest rates as a way of rewarding savers though, such as Nationwide which has introduced a new cash incentive for ISA switchers.
Getting a better return
Janus Henderson argued that savers are sacrificing significant returns by sticking to cash accounts, rather than looking to the investment markets and particularly investment trusts.
It noted that if the typical cash ISA balance was switched to an investment in an investment trust, the account holder would instead enjoy a return of £324.80 in dividends, the equivalent of tax relief of £64.96. That’s more than six times more than through a cash ISA.
That’s just the average too, with some investment trusts delivering even more impressive returns over the last year. The Henderson Far East Income trust for example would mean a return of £849.82 if a typical cash ISA balance was switched, while moving to the Lowland Investment Company would mean a dividend income of £703.75.
Henderson pointed out that this isn’t just a short-term trend either; £1,000 placed in a typical cash ISA in 1999 would be worth £1,705 today, compared to £5,755 for the average investment trust.
Investment trusts are businesses which then invest in other businesses, with the trusts run by investment managers. Money from investors is pooled and used to purchase stocks and shares. This may sound rather similar to an investment fund, but there are key differences, such as the fact that they are ‘closed ended’ and often come with lower fees.
Recent research from Interactive Investor has found that trusts have outperformed investment funds over the last two decades across almost every major sector.
A greater level of risk
It’s important to bear in mind that investing is inevitably more risky than placing your money in a cash account. While you may only enjoy a mediocre return from a cash account, you at least know that you won’t lose any money.
This isn’t the case with an investment. There is always a danger of the value of your investments falling, meaning you end up with less money than you started with. There are plenty of ways to mitigate this risk through, such as by diversifying your investments so that even if some assets drop in price, those falls are likely to be balanced out by an increase in value of your other investments.
James de Sausmarez, director and head of investment trusts at Janus Henderson, said that banks are sending a clear message that they don’t want more cash deposits through the poor interest rates on offer, and savers need to heed that message.
He continued: “As with all investing your capital is at risk as the value can fall as well as rise, but for long-term investors investment trusts could provide a preferred alternative to cash. Not only do they pay income far in excess of anything that can be earned on cash deposits, but they also offer the prospect of capital gains too. All that income and all those capital gains are sheltered from tax if they are held within an ISA.”