Is cash really king?

7th June 2017

Figures suggest that £10,000 invested in a Cash ISA, 10 years ago, just before the start of the financial crisis, is now worth £8,600 in real terms – a loss of 14 per cent, when inflation has been low for much of the period. But still the temptation is to see a Cash ISA as a safe investment.

The money invested in Cash ISAs generates a tax-free return – but these days, it is also pretty much return-free!

We expect that interest rates will remain low for several years to come whilst inflation moving sustainably higher also looks remote, we don’t think there will be any respite for cash savers in the medium-term.

Can you do better?

To an extent that depends on how quickly you need to access your cash!

Cash has a place in everyone’s portfolio that is not in doubt. But it should form part of that portfolio, not dominate it.

There are alternatives asset classes, UK equities included, that are not as risky as you may think, as long as you’re prepared to think long-term.

On a 10-year view, for instance, the probability of loss is negligible while the potential returns are significant for those willing to tolerate the volatility. Time is on your side when you take a long-term view.

So why the inertia?

We suspect that the holders of Cash ISAs are reluctant to take on more ‘risk’ by moving the money out of cash and into other asset classes. Furthermore, many investors do not realise that they can move their money out of a Cash ISA and maintain the tax-free status of their savings!

The best thing you can do is talk to your financial adviser about the pros and cons of switching your money into stocks and shares while still retaining your tax-free status.