This may make cash holdings more attractive, but savers need to carefully consider whether this sweetener is enough to compensate for the potential higher returns available from stock market investments (stocks and shares ISAs).
Performance data over the last 5 years shows all IA (The Investment Association, previously IMA) sectors (excluding cash sectors*) have outperformed cash (using the Libor 3m rate). The difference between the top performing IA sector and cash is quite startling, and brings into sharp focus the greater potential stock market investment can offer compared to holding cash.
For many savers, the thought of investing in the stock market is too daunting, with too many risks, and they prefer the security of investing in cash. However, is the security of cash really worth it, especially in today’s low interest environment? There is no doubt that building a robust and successful portfolio takes research, diligence, focus and time. Delegating the investment process to a professional can help ensure a sound investment process is followed and all pitfalls safely navigated.
Rachael Griffin, financial planning expert, Old Mutual Wealth:
“The scrapping of income tax on interest is a positive move, and will please many savers. However, with interest rates at an all-time low, people should not be blind to the potential of better returns elsewhere. Whilst past performance is not a guide to future performance, the fact that all IA sectors have performed better than cash should make people question the opportunity cost of holding cash.”
* Excludes Money Market and Short Term Money Market IA sectors which delivered 1.23% return and 0.71% return respectively.
Please note, past performance is no guide to future performance. 105% return over 5 years does not reflect ‘normal’ growth projections; this exceptional growth reflects the recent stock market rally in both equities and bonds.