UK savers wary of stocks and shares ISAs despite higher returns

People who put their savings into cash ISAs have missed out on £127bn because of a reluctance to invest in the stock market, a new report claims.

Cash ISAs remain far more popular than stocks and shares ISAs, despite the relatively low returns offered by the lower risk accounts.

Analysis from Scottish Friendly and the Centre for Economics and Business Research (CEBR) reveals that savers have received £75bn in interest since the tax-free cash accounts were first introduced in 1999. However, these same savers could have achieved £202bn in returns if they had invested in the stock market instead.

When it comes to individual savers, someone using their cash ISA allowance each year since 1999 would have accrued an average of £20,628 in tax-free interest, according to the analysis. This is less than a third of the £70,987 they would have achieved in returns from a stocks and shares equivalent.

Interest rates on cash ISAs have fallen sharply in recent years, while the overall performance of the stock market has been strong.

However, UK savers still seem reluctant to ditch their cash ISA.

A Scottish Friendly survey of 2,000 people showed that 40% save into a cash ISA, with more than half doing so on monthly basis.

By comparison, less than a fifth (18%) pay into a stocks and shares ISA and only one in ten (11%) do so on monthly basis.

Nearly a quarter (23%) of respondents said they do not invest in the stock market because they do not fully understand how to. More than a fifth (22%) admitted they were afraid of losing money if they invest, while 15% said they prefer the perceived security that a cash ISA or deposit account offers.

Commenting on the findings, Calum Bennie, savings specialist at Scottish Friendly, said: "Thousands of people across the country are probably thinking they are doing the sensible thing by saving into a cash savings account for their future. But many of them will not know that the value of their cash is being eroded in real terms due to the toxic combination of pitiful savings rates and rising inflation.

"So the message to savers is clear: keep an adequate amount of money in an easy access cash account in case of emergencies, of course, but if you're saving for your future then investing can offer potential for greater returns."