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

Those who saved their money in Isa cash likely outperformed stocks and Isa investors over the past year, new analysis shows.

The average share of Isa Fund suffered a loss of 3.27 percent between February 2022 and February 2023, according to financial information service Moneyfacts.

Meanwhile, the average cash Isa yielded 1.71 percent interest over the same period as savings rates rose sharply.

This came as equity markets had a rough year, breaking the long-term trend of investment returns outperforming cash. The Credit Suisse Yearbook 2023 shows that since 1900 the UK stock market has averaged an annual return of 9.1% versus 4.5% for cash.

While the average investor has lost over the past 12 months, his fate will depend on the type of investments he owns.

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

UK index-linked gilts were the worst performing sector, with funds losing an average of 32.81 percent.

Meanwhile, a cheap, basic FTSE 100 tracker fund would have delivered a total return including dividends of about 4.7 percent, in line with the index.

Rachel Springall, financial expert at Moneyfacts, said: “Stocks and shares of Isas have suffered an overall loss over the past 12 months, with most primary fund sectors posting a loss.

This should not be a major shock given the significant volatility markets have felt over the past year, but it does highlight the importance of keeping track of investments and continued fund performance.

“Cash ISAs have recovered by comparison, thanks to competition and successive increases in base rates.”

Outperformed: In the year before the last one, February 2021 to February 2022, the average Isa fund rose 6.92% compared to just 0.51% for cash Isa funds

Invest or save in 2023?

The savings rate has reached a high not seen in more than a decade. The best cash Isa deals now pay over 3 percent, while the best fixed rate deals pay 4 percent or more.

> View the best Isa savings rates for cash here

While the past year may have been tough for those with stocks and Isas stocks, the outlook for many UK-focused investors will have improved in recent months, with the FTSE 100 trading above 8,000 for the first time earlier this month, hoping that inflation peaked.

Ultimately, poor short-term performance in stocks doesn’t necessarily make them a better alternative to cash.

Money invested is likely to outperform money saved in the long run.

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

Moneyfacts’ research found that in the previous year, between February 2021 and February 2022, those with their cash in Isas only posted a gain of 0.51 percent, compared to an average gain of 6.92 percent for stocks and equity funds .

This means that those with stock Isas have on average still outperformed those with cash Isas over the past two years.

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

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

Choices: Savers looking to use their Isa distribution before the 2022/2023 tax year ends in April may consider a stock Isa as an alternative to a cash Isa

Springall added, “Cash ISAs have historically been a more popular choice among consumers, but some investors may rethink their attitude to risk in hopes of growing their pot over the longer term.

“The right Isa for any saver will depend on their individual needs and those considering stocks and shares should bear in mind that past performance is never guaranteed to be reflected in future returns, so it is vital that investors feel comfortable feel about their risk level.

Savers would be wise to compare the latest cash Isa rates if they wish to take advantage of their current Isa fee as attractive deals are already appearing in the top rate tables.

“Those looking to move their older Isa’s should definitely transfer them to another Isa so they can keep their duty-free packaging, and keep in mind that not every deal offers this option.

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