According to latest HMRC records, a dismal 0.93% return on the average cash ISA in 2017 proved the worst return in history. This, in a year when the FTSE All Share index returned 13.10% including dividends. So are cash ISAs dead? And what is a good alternative?

A look at the current Cash ISA savings rates on offer give for grim reading: The highest rate currently on offer is a meagre 2.25% for an Instant Access Cash ISA (according to Compare the Market data). It can come as no surprise that, in a world of ultra-low interest rates, returns on cash savings are not overly attractive. So what are the alternatives to Cash ISAs?

The most widely-used alternative is the Stocks & Shares ISA – in which an individual can invest up to £20,000 (standard limit across all ISAs) and invest this money into potentially higher-growth assets, namely shares and bonds. These investments are higher risk than cash, and so basic portfolio theory dictates savers should expect a higher rate of return for taking on this additional risk, though this isn’t always the case!

Take a look at the chart below covering the 2017 calendar year as an example. Here, we compare the following:

  • GR6 (risk level 6 out of 10) – Group Rapport’s Higher-Medium Risk portfolio;
  • IA Mixed Investment 40-85% Shares sector (GR6 benchmark) – a composite of comparable investment funds;
  • UK Consumer Price index – UK inflation rate;
  • IA Money Market sector – cash deposit funds sector.

Being that many of our clients have a medium to long-term investment outlook, and the majority will tend towards a medium risk level, the GR6 portfolio is a good comparator. We can see from the above chart that a standard Group Rapport GR6 portfolio returned 15.77% (before fees) in 2017, compared with only 9.98% for the benchmark/competition, an impressive 5.79% outperformance. Importantly, the GR6 portfolio also outperforms the UK Consumer Price index (inflation), meaning investors made a real return on their investment.

Now compare this to the average Cash ISA return of 0.93% stated at the start of this article. Whilst the Cash ISA gained more than a typical deposit account (to be expected), which returned around 0.14%, it failed to even match inflation at 2.94%, meaning a real loss for investors of 2.01% over 2017 alone.

So are Cash ISAs dead? Well, no. Cash ISAs are unappealing currently because of the low interest rate environment we find ourselves in, and particularly with inflation currently higher than interest rates, meaning a negative real return for savers. However looking ahead, we could easily enter into a period of monetary contraction, in which interest rates rise and markets, particularly bonds, could begin to suffer – a definite risk given the extended period of monetary accommodation we’ve seen over the past decade.

The question to consider then, is do you want to save, or invest? Cash ISAs are great places to store money for your short-term needs (save). However, all things considered, if you’re investing for the medium to long-run, the benefits of taking on more investment risk for higher potential returns is a compelling case for the Stocks & Shares ISA.


* This article does not constitute financial advice and does not make any specific recommendations. You should always consult your Financial Adviser before making any investment decisions. Past performance is no guarantee of future performance.