As the end of the tax year looms, many savers and investors may be trying to decide whether to pay more money into their cash ISA or stocks and shares ISA.
Some will be worried about speculation that chancellor Rachel Reeves is considering reducing the cash ISA limit in a bid to get savers investing and boost the UK economy. They may therefore choose to squirrel away more money into their cash ISA in case any changes are announced.
Falling cash ISA rates may also be a concern after the Bank of England cut interest rates earlier this month, and economists warn of more rate cuts to come.
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This could make them favour investing in a stocks and shares ISA instead.
ISA customers have until midnight on 5 April to use up their £20,000 ISA allowance. Once the 2025-26 tax year starts, the current year’s ISA allowance is lost.
When weighing up whether to contribute to a cash ISA or stocks and shares ISA it’s also worth considering their performance.
Cash savers have enjoyed decent returns over the past few years, thanks to rising interest rates. The average cash ISA rate during the 12 months to February 2025 was 3.8%, according to Moneyfactscompare.co.uk.
This was higher than the 3.73% rate recorded a year earlier, and the 1.71% seen a year before that.
However, the average stocks and shares ISA has returned more than three times that amount. The average stocks and shares ISA returned 11.86% between February 2024 and February 2025, said Moneyfactscompare.co.uk, which analysed Lipper fund sectors.
Iain Barnes, chief investment officer at the wealth manager Netwealth, tells MoneyWeek: “It’s interesting that, over this period, investing in markets was better rewarded than holding cash, even at the high level of interest rates available last year.”
However, he adds: “This better performance isn’t unusual. Stocks and shares ISAs likely capture a wide range of underlying exposures and while we wouldn’t recommend investing for only one year, a diversified portfolio of riskier investment assets [often outperforms cash]. More importantly, the gap in performance increases over time, so that if investors are able to commit to a longer investment horizon, they are usually rewarded.”
Why did stocks and shares ISAs outperform cash ISAs?
The Moneyfactscompare.co.uk analysis looks across more than 40 Lipper fund sectors. It found that the best-performing sector was “financial and financial innovations” so if an investor solely invested their ISA in that sector they could have got a bumper 34.74% return.
North America, Japan and UK equity income also returned strong growth of 24.43%, 10.08% and 14.50% respectively over the past 12 months.
In contrast, the worst-performing sector was Latin America, which fell 11.15%.
Barnes notes that stocks and shares ISAs’ outperformance was due to “global economies proving more resilient to high interest rates than many people imagined, and markets generally performing well in response”.
He adds: “Equity markets are pushing higher amid relentless political noise and usually driven by events in the US. It is reassuring to see good performance broadening out from the group of very successful technology mega companies based in the US to other parts of the market, which have been less popular in recent years.”
What’s the outlook for this year?
Against a backdrop of falling cash ISA rates, stocks and shares ISAs may well outperform again over the coming year.
However, stock markets will also have their own challenges, such as weak economic growth due to global trade and fiscal policies, and stubborn inflation.
“Ultimately, stock markets will need to assess whether the current underlying strength of companies growing profits can offset the noise we all hear in daily newsflow,” says Barnes.
“Some parts of the market are expensive after the strong performance of recent years, but we recommend building a diversified portfolio over second-guessing where the best returns will come from. Even bond markets, where returns have been weak in recent years, now offer good yields which will be appreciated as and when cash rates come down. Simply put, we expect investors will continue to be rewarded for putting their money to work in the years to come despite the risks that lie ahead.”
Should I switch to a stocks and shares ISA?
It’s important to point out that past performance is not an indicator of future performance, and that investing is riskier than keeping your money in cash.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, notes that while savers may be intrigued to know that stocks and shares ISA growth outpaced cash ISAs over the past 12 months, “cash ISAs still have their part to play for customers, particularly the more risk averse”.
She adds: “The government’s freeze on income tax thresholds makes cash ISAs more attractive, as there will be more savers falling into the higher-rate tax bracket, effectively halving their personal savings allowance [from £1,000 to £500].”
Laura Suter, director of personal finance at the investment platform AJ Bell, tells MoneyWeek that the key question when choosing between a cash ISA and a stocks and shares ISA is: are you saving for the short term or the long term?
She explains: “If you’re setting money aside for an emergency fund, typically three to six months’ worth of expenses, then a cash ISA is a solid option. It keeps your money accessible while offering tax-free interest.
“But if you’re looking at medium- to long-term goals, such as saving for retirement alongside a pension, for a house deposit or home improvements in future, then a stocks and shares ISA can be a more effective route, given that markets tend to rise over time and outperform cash, despite short-term fluctuations.”
According to Suter, about three million people have more than £20,000 in a cash ISA without also holding a stocks and shares ISA, and over one million of them have more than £50,000.
She says this raises the issue of whether these “cash-heavy savers are missing out on long-term stock market returns. The Barclays Equity Gilt Study, which tracks data back to 1899, shows that over a 10-year period, UK equities have a more than nine in 10 chance of beating cash returns”.
Suter adds: “That’s not to say holding cash is inherently bad. Some people prefer the security of knowing their money is safe from market fluctuations. But it should be a conscious decision, rather than defaulting to cash and unthinkingly hoarding it.”
