Are you missing out on investment returns by leaving your money in cash?
It’s a tricky question to answer.
Unlike cash, when you invest money, its value can go down as well as up.
The higher potential returns you can get from investments, compared with interest on cash, is the result of placing your capital at risk.
In the current low-interest rate environment, it’s only natural that savers are questioning the returns they are currently receiving on their cash holdings.
Moving from cash to investments is not a decision to take lightly, and professional advice should be sought first.
Where it’s right to keep money in cash, to satisfy the goals identified in your financial plan, then you should keep that cash under regular review, to make sure you get the most competitive interest rate.
Some new research has found that nearly £130 bn in cash Individual Savings Accounts (ISAs) has never been moved.
The research, which was commissioned by peer-to-peer lender Relendex, found that nearly half of those savers with a cash ISA have never switched provider.
As a result, they could be missing out on more competitive rates of interest.
With the average cash ISA now worth £17,000, and High Street banks offering average interest rates of 0.7%, savers are currently getting an average of £119 in interest each year.
Our behaviour when it comes to sticking with a cash ISA provider is at odds with our broader shopping around habits.
The research found that 82% of UK adults are shopping around to find the best deal for other products and services, but spend next to no time researching the best ISA rates.
According to the research, on average respondents switch their main utilities and household policies, including car insurance, home insurance, broadband and mobile phone provider, once every 2.5 years.
They spend a total average time of 12.1 hours researching the best deals in these areas.
But for those who have switched cash ISAs, they spend an average of 1.6 hours making the switch, time that is spread out over an average of 4.6 years with the same provider.
Paul Sonabend, Executive Chairman at Relendex, said:
“It is very concerning to see the huge amount of money sitting in Cash ISAs often earning paltry returns.
It is clear from the research that UK adults prioritise saving money by switching utilities and policies such as their car insurance and mobile phone providers over spending time picking the best Cash ISA to invest in.
This is a great failure.”
If you do shop around to find a more competitive interest rate for your cash ISA, there are a few points to remember.
To maintain the tax-free status of your cash ISA, you will need to transfer it to another ISA provider. You will need to complete an ISA transfer form to facilitate this switch between savings providers.
You should not close the cash ISA and then use the proceeds to subscribe to a new cash ISA, as doing this will result in the loss of your accumulated allowance.
If you want to transfer money you’ve invested in an ISA during the current tax year, you will need to transfer all of it in one go.
However, for cash ISA monies saved in previous tax years, you can choose whether to transfer all or part of the cash to a new provider.
When shopping around for a more competitive interest rate, check that the savings provider will accept an ISA transfer; not all do, and some of the most competitive interest rates specifically exclude ISA transfers.
Also check the terms of the new product as you could be locking your money away for a year or longer, with penalties for earlier access, to access a higher interest rate.
It’s worth noting that there are a growing number of innovative finance ISA providers now, offering what appear to be higher interest rates than those available from cash ISAs.
These innovative finance ISAs, which include peer-to-peer lending, are not without risk to your capital, and the returns they forecast may not be realised either.
And if you go chasing higher potential returns than a cash ISA has to offer, be sure to seek professional advice first, making investment decisions based on a comprehensive financial plan.