ISA Savers Losing Out by ‘Not Shopping Around’

Savers are letting their savings dwindle away by leaving them sat in Cash ISAs, instead of investing their hard-earned cash.

A survey by analysts at AJ Bell found that Cash ISA savers held an average of £27,727 but weren't willing to shop around to make the most of their savings.

We know that since the start of the pandemic, many savers have been all cashed up with nowhere to go. But our research shows that cash hoarding isn't just a recent phenomenon; it's been happening for some time and reflects a natural aversion to taking a risk with money that has been hard-earned, as stock market investors need to avoid irrational exuberance, so cash savers should be wary of excessive prudence

said Laith Khalaf, a financial analyst at AJ Bell.

With interest rates at an average of just 0.4%, savers who leave their savings sat in ISA account actually degrade the value of their savings over time, said Mr Khalaf:

Over the last ten years, the average Cash ISA has turned £10,000 into £9,770 after factoring in inflation, while in contrast, an investment in the global stock market has turned £10,000 into £20,760 in real terms. Looking at returns from 1899, Barclays found that over ten years, UK equities have beaten cash 91% of the time.

Given that, today, cash interest rates are at record lows, it would have to be an extremely anomalous decade for the next ten years to buck that trend.

The survey found that nearly a quarter of ISA holder reported that their interest rate was 1%+, despite the fact that the average rate is less than 0.5%.

On average, savers last reviewed their interest rate more than two years ago, during which time interest rates have more than halved.

Young people held the most in ISAs, with a typical savings balance of £32 768 for 18-34 year-olds, compared to £23,236 for 35-54 year-olds and £25,574 among those 55 and older.

AJ Bell pointed out that this could partly explain why so many savers were hesitant to keep their savings at hand.

There are some reasons why you might want to hold more than six months of expenses in an ISA, namely if you are saving for a specific goal, for instance, a house deposit. This probably explains a surprising kink in the data, which shows that younger savers actually have more held in Cash ISAs than older generations.

But for anyone not expecting to need their cash in the next 5 years, stocks and other investments could be a better option than cash.