Since the 2008 financial crisis, the highest cash Isa rates have been available to savers seeking to utilize their annual £20,000 Isa allowance.
According to Moneyfacts, the average easy-access cash Isa rate has achieved levels not seen since February 2009, while the average one-year fix has reached levels not seen since December 2008.
The best easy-access cash Isa rate is currently 3.2%, while the best one-year fixed rate is 4.15 %.
Those who utilized equities and shared Isa in the preceding year have likely been licking their wounds as of late.
According to a separate Moneyfacts analysis, the average stocks and shares Isa fund incurred a loss of 3.27 percent between February 2022 and February 2023.
However, this does not mean that cash is monarch, especially for those using their Isas as a long-term savings vehicle, as the returns on long-term investments have proven to be superior.
The Credit Suisse Yearbook 2023 indicates that since 1900, the average real (inflation-adjusted) annual return for the UK stock market has been 9.1%, compared to 4.5% for cash.
The Barclays Equity Gilt Study 2022 revealed that during the decade leading up to the end of 2021, investing in the UK stock market (equities) generated an average annual real return of 4.7%, whereas cash generated a real return of -2.5%.
It is essential to note, however, that the cash returns in this section pertain to average accounts and not the best deals.
The Financial Services Compensation Scheme protects deposits up to £85,000, so cash savings also offer a known return and security.
Why invest or save in an Isa?
Consider an Isa if you want to shield your hard-earned savings interest and investment gains from the taxman.
An Isa shields savings or investments from taxation, and with rising savings rates and an impending capital gains tax and dividend tax seizure, an Isa makes even more sense than before.
Given the current volatility of the stock market, a cash-only Isa may appear to be a prudent choice. On the other hand, it cannot be denied that, over the long term, investing tends to make individuals wealthier.
In the meantime, the Barclays Equity Gilt Study 2022 also considers returns over the long term. If you had invested £100 in the UK stock market in 1899 and reinvested dividends, your investment would have grown to £3,439,776 by the end of 2021.
In contrast, that £100 saved in cash would have been worth £20,933 after accounting for interest.
Even so, entering the market can be a worrisome prospect because no one wants to invest a large sum of money only to have the market promptly decline.
Regularly drip-feeding smaller quantities of money into investments reduces risk and could help mitigate the potential damage of market timing errors.
AJ Bell’s analysis indicates that the difference between monthly Isa savings and annual Isa savings is relatively modest over the long term.
According to Laith Khalaf, chief of investment analysis at AJ Bell, compound market returns are a humbling force that tends to favor lump sum investing over monthly savings, simply because more of your money is in the market for longer.
‘However, when it comes to the losses you incur during market downturns, the regular savings plan prevails because less of your capital is exposed and your monthly contributions continue to purchase shares at lower prices.
As the end of the tax year approaches, many investors will be stuffing lump funds into their Isas to beat the 5 April deadline, but there are compelling reasons why they should also establish a monthly Isa investment plan.
Investing for the long term can help you weather cyclones. The Barclays Equity Gilt Study 2022 revealed that the longer investors held shares over any given period, the higher the likelihood that they outperformed cash.
In any two-year holding period, stocks outperformed cash 69% of the time, 76% of the time over five years, and 91% of the time over ten years.
Important to remember is that saving and investing are not mutually exclusive. While maintaining the majority of their funds in cash, savers can experiment with investing. Alternatively, investors can reduce risk by choosing to invest more in a security with a known interest rate return from a cash Isa.
Lump sum versus routine investing
The returns over the past two decades suggest that you should invest your funds sooner rather than later.
According to AJ Bell, a single-sum investment of £20,000 in a typical global equity fund twenty years ago would now be worth £118,570.
A comparable regular investment plan of the same total amount, or £83.33 per month, would now be worth £51,360, which is less than half the value despite having the same monetary outlay.
Those who wish to make a gradual transition from cash to investments can at least reduce the margin by obtaining a high-interest rate on their cash before placing it in an Isa.
The best easy-access cash Isa rates are presently 3.2%, courtesy of Santander and Cynergy Bank, while the best one-year fixed rate is 4.15 %, also offered by Santander.
If you have £20,000 to invest as a single sum but instead decide to drip-feed it into the market monthly, you can expect to earn interest while you wait.
This could substantially increase returns over extended periods. Assuming a 4% interest rate on cash balances, £20,000 invested in monthly increments of £83.33 in a global equity fund over the past 20 years would now be worth £70,295.
However, this is still significantly less than what a lump sum investment would provide, due to the greater compound returns offered by the market.
