Stocks and shares Isas down on last year while cash Isas edge up: Which should you choose?

Those saving their money into a cash Isa are likely to have outperformed stocks and shares Isa investors over the past year, new analysis has revealed.

The average stocks and shares Isa fund experienced a loss of 3.27 per cent between February 2022 and February 2023, according to the financial information service Moneyfacts.

Meanwhile, the average cash Isa returned 1.71 per cent in interest during the same period, as savings rates rose sharply.

This came as stock markets suffered a tough year and bucks the long-term trend of investment returns outperforming cash. The Credit Suisse Yearbook 2023 shows that since 1900 the UK stock market has averaged a 9.1 per cent annual return vs 4.5 per cent for cash.

Although the typical investor lost out over the past 12 months, their fate will have depended on the types of investments they hold.

The best-performing fund sector for stocks and shares Isas was commodities and natural resources, up 26.64 per cent on average. 

UK index-linked gilts were the worst-performing sector, with funds falling 32.81 per cent on average.

Meanwhile, a low-cost simple FTSE 100 tracker fund would have delivered a total return including dividends of about 4.7 per cent in line with the index.

Rachel Springall, finance expert at Moneyfacts, said: ‘Stocks and shares Isas suffered an overall loss over the past 12 months, with most primary fund sectors returning a loss.

‘This should not be much of a shock considering the significant volatility felt across the markets over the past year, but it does emphasise the importance of keeping track of investments and ongoing fund performance.

‘Cash Isas have rebounded in comparison, thanks to competition and consecutive base rate rises.’

Should you invest or save in 2023?

Savings rates have reached heights not seen for more than a decade. The best cash Isa deals now pay north of 3 per cent, while the best fixed rate deals pay 4 per cent or more.

> Check out the best cash Isa savings rates here

While the past year may have been tough for those with stocks and shares Isas, the outlook for many UK-orientated investors will have improved in recent months, with the FTSE 100 topping 8,000 for the first time ever earlier this month on hopes inflation might have peaked. 

Ultimately, short-term poor performance in stocks and shares does not necessarily make cash a better substitute.

Money invested will be likely to do better than money saved over the long run.

According to research by asset manager Janus Henderson, savers have only outperformed investors in four of the last 20 years.

The research from Moneyfacts showed that in the previous year, between February 2021 and February 2022, those with their money in cash Isas only recorded a 0.51 per cent gain, compared to an average gain of 6.92 per cent for stocks and shares funds.

This means that on average over the past two years, those with stocks and shares Isas have still done better than those with cash Isas.

However, it’s worth pointing out that given recent double-digit inflation, it’s likely that most investors and savers are still down in real terms.

> How many funds should Isa investors hold in their portfolio? Three investment experts share what they do with their own money 

Springall adds: ‘Cash Isas are traditionally a more popular choice among consumers, but some investors may well be reconsidering their attitude to risk in hopes of growing their pot over the longer-term.

‘The right Isa for any saver will come down to their individual needs and those considering stocks and shares must keep in mind that past performance is never guaranteed to be reflected in future returns, so it’s vital investors are comfortable with their level of risk.

‘Savers would be wise to compare the latest cash Isa rates if they want to take advantage of their current Isa allowance, as enticing deals are already entering the top rate tables.

‘Those looking to move their older Isas must be sure to transfer these to another Isa so they can retain their tax-free wrapper, and keep in mind not every deal will offer this option.

‘Whether someone is savvy with investing in funds or just a beginner, it is always wise to seek advice and regularly review any risk profile.’