Investment account that attracts more cash from millennials than baby boomers

Saleha Riaz
·4-min read
Investment in the global stock market has turned £10,000 into £20,760 in real terms, according to a study. Photo: Getty
Investment in the global stock market has turned £10,000 into £20,760 in real terms, according to a study. Photo: Getty

Millennials have more in Cash ISAs than baby boomers, a new report shows, which also revealed that savers are holding high levels of cash and not switching accounts looking for better rates.

A report by AJ Bell (AJB.L) found that those in the 18- to 34-year age bracket have average Cash ISA holdings of £32,768 ($45,471). This figure falls to £23,236 for those aged between 35 and 55 and to £25,546 for those 55 and above.

Meanwhile the report said 45% of Cash ISA savers have never switched to a different provider to get a better interest rate and the typical saver last reviewed their interest rate two-and-a-half-years ago, during which time the average rate has more than halved.

That may explain why 25% of Cash ISA savers say they’re getting a rate of 1% or more, when the average rate is just 0.4%, the report said.

“We know that since the start of the pandemic, many savers have been all cashed up with nowhere to go. But our research shows that cash hoarding isn’t just a recent phenomenon, it’s been happening for some time, and reflects a natural aversion to taking risk with money that has been hard-earned,” noted Laith Khalaf, financial analyst at AJ Bell.

Chart: AJ Bell
Chart: AJ Bell

“It’s definitely prudent to build up a cash buffer to deal with any unexpected costs, particularly in uncertain times. But Cash ISA savers may well be doing themselves a disservice by holding too much money in cash, opening themselves up to inflation risk, and missing out on the higher returns potentially available from investments,” he warned.

When comparing these products to investing in the stock market, AJ Bell found that over the last 10 years, the average Cash ISA has turned £10,000 into £9,770 after factoring in inflation.

READ MORE: Top 10 ISA myths busted

In contrast, an investment in the global stock market has turned £10,000 into £20,760 in real terms.

If you’re putting money away for five to 10 years, then you should start to think about putting at least some of it in the stock market, said Khalaf.

Half of Cash ISA savers surveyed (51%) said they had considered switching to a Stocks & Shares ISA.

It used to be the case that you couldn’t cross the streams, but since 2014 you have been allowed transfer money from a Stocks and Shares ISA to a Cash ISA, and vice versa.

“Doing so may be worthwhile if you feel you’ve got too much sitting in cash, earning next to nothing, and you’re willing to keep your money invested for the long term. You must be willing to tolerate falls in the value of your capital however, but the reward should be higher returns in the long run," said Khalaf.

According to him, “it’s important to always maintain a cash buffer for emergencies, three to six months of expenditure is the rough rule of thumb, but beyond this, you can start to think about investing in the market."

The report also found Cash ISA savers aren’t shopping around for the best rate.

"Much of their apathy can be attributed to ultra-low interest rates, but part of it may simply be that they haven’t checked the rate they’re getting,” said Khalaf.

“Not all rates move in step though, and individual savers can suffer as a result of their provider slashing rates more aggressively than the rest of the market, hence why it continues to make sense to shop around,” he added.

For instance, last November, savers in the National Savings and Investments' Direct ISA saw their interest rate cut from 0.9% to 0.1%, while the best rates on the market are around 0.5%.

AJ Bell's survey also shows Cash ISA savers reported holding on average £27,727 in their accounts.

“There are some reasons why you might want to hold more than six months of expenses in an ISA, namely if you are saving for a specific goal, for instance a house deposit," he said, adding that "broadly speaking, if you think you may need access to your money within five years, then cash is the best option.

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