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04 May 2017

Investors should avoid ´dash for cash´, says Royal London

New figures from HM Revenue and Customs show that investors continue to favour cash ISAs, despite the relatively low rate of return offered by these savings accounts over the long term.

Aggregate figures for 2014/15 and 2015/16 reveal that around £120bn was deposited into cash ISAs over the two-year period. In comparison, just £43bn was invested in stocks and shares ISAs.

A recent Royal London policy paper, ‘The Curse of Long-Term Cash´, raised concerns about the poor returns for long-term investors who opt for cash ISAs.

According to the life, pensions and investment company, investors have lost £100bn in returns over the last decade by investing for the long term in low-return cash ISAs rather than a diversified stocks and shares ISA.

With interest rates on cash deposits still at record low levels and inflation rising, Royal London argues that investors are holding excessive amounts in accounts with low interest rates which deliver negative real returns. It points out that £1,000 put into a deposit account 10 years ago would be worth less than £900 in today´s money, while the same £1,000 put into a simple multi-asset fund would have been worth more than £1,500.

The increase in the ISA limit to £20,000 in April 2017 is only likely to increase the temptation to invest long-term savings in cash, the company said.

Royal London personal finance specialist Helen Morrissey commented: “Saving in cash clearly has a part to play for short-term emergencies and rainy day savings. But a combination of low interest rates and rising inflation means that money in a cash ISA is losing spending power, year after year. The data also shows that lower income households and younger savers are particularly at risk of losing out. While cash ISAs have a role to play investors must also consider the benefits of the investment returns gained from stocks and shares ISAs.

“The Government needs to think carefully about its ISA policy and should consider reintroducing separate lower limits for cash ISAs to avoid a ‘dash for cash´ costing savers dearly.”

Copyright © M2 Bespoke 2017

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