Nervous investors who have sold out of the market risk losing money in real terms by leaving cash in their stocks and shares ISA, Trustnet can reveal.
We looked at the interest rates paid by five of the largest UK providers – Hargreaves Lansdown, AJ Bell, interactive investor (ii), Fidelity and Barclays – and found none are paying more than the current inflation level.
Cash has been a safe haven for investors in recent years as rising interest rates have made the asset class a viable (and appealing) option for the risk-averse to make reasonable returns.
But last week the Bank of England (BoE) cut interest rates to 4%, despite noting that inflation is forecast to rise in the coming months to peak at around 4% in September.
This has put cash savings under scrutiny.
But while cash account rates are falling (the average savings rate calculated by Moneyfactscompare stands at 3.47% following the BoE’s rate change last week, down slightly from 3.5% a week ago), savers should be even more wary of leaving cash in a stocks and shares ISA as the rates are significantly lower.
The most generous place for nervous investors to hold cash in a stocks and shares ISA is Fidelity, which pays a flat 2.7% on these wrappers.
Marianna Hunt, investment and pensions specialist at Fidelity International, said investors who have committed money to a stocks and shares ISA have done so with the knowledge they can lock that cash away for years.
“If that’s the case and you’re working towards a long-term goal, then you should question why you are leaving that money in your stocks and shares ISA in cash,” she said.
There are reasons investors may move to cash in the short term, however, such as giving savers time to decide what to invest in while maximising the ISA allowance. Some may move money into cash temporarily if they’re worried about short-term market volatility, choosing to sell down their holdings for a short period to allow things to settle.
But cash can be left languishing for longer than expected, which is where issues may occur.
“If fear or apathy means investors are sitting on large cash piles over longer periods, that could begin to act as a big drag on returns,” Hunt noted.
Investors with AJ Bell, ii and Hargreaves can receive a higher interest rate based on the amount of cash sat on the sidelines, with the firms using a tiered system.
Following the BoE’s decision to lower interest rates this month, customers of Hargreaves Lansdown will get a lower interest rate on their cash from 22 August.
Any amount up to £9,999 will be paid 1.75% interest. This then scales up to 1.85% on £10,000 to £49,999, 2.05% on £50,000 up to £99,999 and 2.75% on savings of more than £100,000.
A spokesperson for the firm said its clients receive a “competitive rate of interest”.
“For those looking to hold cash for longer periods of time, the most rewarding approach is to use the Active Savings service, which offers rates on easy access accounts of up to 4.26%. We proactively communicate our Active Savings service, which includes a cash ISA, to help clients make their money work harder for them,” they continued.
Interactive investor has also lowered the rates on cash held in a stocks and shares ISA from 25 August. For the first £10,000 investors will get 1.25%. On savings from £10,000 up to £100,000 they will receive 1.5% while anything over £100,000 will garner a 2.4% interest rate.
AJ Bell clients meanwhile will get 1.8% on cash less than £10,000, rising to 2% on balances of £10,001 and £100,000 with a top rate of 2.55% on pots above £100,000.
It pays higher rates on SIPPs, while the firm also offers Dodl, an investing app that offers a higher rate of interest on ISA account cash at 4.32%.
Laith Khalaf, head of investment analysis at AJ Bell, said investors worried about markets should look to invest in less risky options, rather than turn to cash.
“If you’re worried about taking on the full risk of the stock market then you can invest in multi-asset funds which hold a mix of shares, bonds, cash and other assets to dampen volatility,” he said.
Lastly, Barclays Smartinvest pays a flat 1.1% fee on cash sat in a stocks and shares ISA – the lowest of all those looked at.
Clare Francis, director of savings and investments at Barclays, said the ability to hold cash within a stocks and shares ISA is “useful” but noted they are “not intended to be a long-term home for cash savings”.
“Their main purpose is to provide a way of investing tax efficiently. As well as the Smart Investor Investment ISA, Barclays also offers a range of cash ISAs for those looking to keep their savings in a tax-efficient account.”
All agreed that clients with the ability to lock their cash away for the long term should look at investing as an option.
Hunt noted that investing £1,000 in global stock markets at the beginning of 2000 would have grown a cash pot to around £5,000 by May 2025, compared with £1,700 from using cash accounts.
“True, those investments might have fallen in the short term and past performance is no guarantee of the future, but still the difference is striking,” she said.
Camilla Esmund, senior manager at interactive investor, added: “While saving in cash accounts offers security, research shows investing is typically the better option for long-term growth, especially if you’re making the most of the tax-efficient allowances.
“Our research consistently shows that investing can be intimidating and many don’t know where to start. However, even small or modest contributions can make a big difference over time.”