Cash ISA accounts outnumber shares three to one

But in the long-run share investments outperform cash, Virgin Money says.

Cash ISA accounts are being opened at the rate of three to one against equity ISAs as savers are scared off by stock market volatility in the run up to the end of the tax year according to analysis* from Virgin Money.

More than 7.38 million cash ISAs have been opened this tax year compared with 2.49 million mini and maxi equity ISA accounts, Virgin’s analysis shows. And even though savers can put more money into equity ISAs, around 2.5 times more is being invested in mini cash ISAs compared with equity equivalents.

But Virgin Money is warning investors that discounting equities now could mean losing out in the long run. Its figures show that shares on average outperform cash investments over a three or five year period.

The Virgin Money analysis** shows that while the FTSE All Share Index was down 6.16 per cent in the year to 10th March 2008, over the past three years it is up 28.06 per cent and over five years it has increased by 94.31 per cent.

However leading savings rates over the same period have delivered less significant returns. Virgin Money figures show that over the same periods cash performs well in the first year but in the long term performs less impressively. In the year to 10 March cash investors could expect a 5.71 per cent return, over three years 15.80 per cent and over five years 25.35 per cent.

Virgin Money spokesman Scott Mowbray said: "The poor performance by stocks and shares in the past twelve months has inevitably pushed investors towards cash ISAs. But if you took that view five years ago you’d be kicking yourself now as shares have consistently performed well compared to cash."
Chancellor Alistair Darling confirmed in last week’s Budget that ISA rules will change from 6 April 2008 to allow maximum investments of up to £7,200 in a tax year compared with £7,000 now. The cash ISA limit will rise to £3,600 from £3,000.

And crucially investors with money in cash ISAs will be allowed to convert them into shares ISAs without affecting their tax-free limit. Around £22.6 billion was invested in cash ISAs during the 2006/07 tax year, Virgin Money says.

Scott Mowbray added: "Investment Management Association figures how investors have been cashing in unit trusts with net outflows in January, December and November.

"But going for the safety of cash is potentially risky if it means missing out on long-term gains. All the evidence is that shares provide stronger returns in the long-run than cash."

* Virgin Money analysis of HMRC data.
FTSE All Share performance
– over one year (01/03/2007 – 10/03/2008): down 6.16%
– over three years (01/03/2008 – 10/03/2008): up 28.06%
– over five years (03/03/2003 – 10/03/2008): up 94.31%
Bank of England base rate performance:
– over one year (01/03/2007 – 10/03/2008): up 5.71%
– over three years (01/03/2008 – 10/03/2008): up 15.80%
– over five years (03/03/2003 – 10/03/2008): up 25.35%.

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