Cash is still king for ISA investors

Cash remains the favoured choice for ISA savers according to the latest HMRC annual savings statistics. In the 2022/23 tax year, 12.5 million adult ISA accounts received subscriptions, an increase from 11.8 million in the previous tax year. The total amount subscribed into these ISAs was just over £72.0 billion, an increase of £5.2 billion compared to 2021/22. £42 billion was paid into cash ISAs compared to £28 billion paid into stocks and shares ISAs, with the other £2 billion mostly subscribed to LISAs. The gap between cash saving and investing widened this year with the stocks and shares ISAs amounts falling 18% compared with the previous year.

The decline in subscriptions to stocks and shares ISAs partly marks the end of the Covid-era investing surge, with markets returning to more typical conditions. It has also been influenced by the return to higher interest rates on cash savings following on from a long period of historic lows.

One of the primary reasons that cash ISAs continue to be favoured is their low-risk nature. For risk-averse savers, potentially those nearing retirement or those with short-term savings goals, the assurance of not losing their principal amount makes cash ISAs an attractive option.

The trade-off of sticking with cash ISAs is the challenge of keeping up with inflation. In recent years, inflation rates have often outpaced the interest earned on cash savings, meaning that the real value of money saved in a cash ISA could decrease over time.

While there will always be reasons to hold some cash, the regulator does view high levels of cash held by consumers as an issue. The Financial Conduct Authority (FCA) has expressed concerns about consumers holding excessive amounts of cash, particularly in low-interest accounts. They acknowledge that while some cash savings are essential for short-term needs and emergencies, holding large sums in cash over the long term in their view can lead to missed opportunities for better returns through investment, especially in times of lower interest rates and higher inflation. The FCA reports that nearly 8.6 million consumers are holding more than £10,000 of investible assets in cash. As part of their strategy they want to reduce this by 20% by 2025.

One of the keys to achieving this is for more consumers to seek and receive regulated advice, but the FCA also acknowledges there is an issue here with the advice gap, when consumers cannot access or afford financial advice or where suitable advice is not available to them. This gap typically affects individuals who have limited financial resources or less complex financial needs, as the cost of receiving personalised advice can often outweigh the perceived benefits.

The FCA's Advice Guidance Review is an initiative aimed at clarifying the distinction between financial advice and guidance. The review seeks to establish clearer rules around what constitutes advice versus guidance, reducing confusion for both firms and consumers. By clarifying the regulatory framework, the FCA hopes to encourage more firms to offer broader financial guidance, which can help individuals who may not need or be able to afford full financial advice.

Guidance will never be as effective as full financial advice because, by its nature, it can only provide general information rather than personalised recommendations tailored to an individual's unique circumstances. Better guidance alone is unlikely to move those with a low-risk cash savings mentality into more growth-oriented investments.