ISAs for stocks and shares outperform cash ISAs - is it time to begin investing?

Over the previous 12 months, the average stocks and shares ISA returned nearly 12 percent, while the average cash ISA returned 3 points 8 percent

Is it time to start investing, as Rachel Reeves contemplates lowering the cash ISA limit?

As the tax year draws to a close, many investors and savers may be debating whether to increase their contributions to their stocks and shares ISA or cash ISA.

The rumor that chancellor Rachel Reeves is thinking of lowering the cash ISA limit in an effort to encourage savers to invest and strengthen the UK economy will worry some. In the event that any changes are announced, they might decide to put more money into their cash ISA.

Economists warn of more rate cuts to come, and falling cash ISA rates could be a concern following the Bank of England's interest rate cut earlier this month.

This might persuade them to invest in an ISA for stocks and shares instead.

On April 5, ISA customers have until midnight to spend their entire 20,000 ISA allotment. The ISA allowance for the current year expires when the 2025 - 2026 tax year begins.

It's important to take their performance into account when deciding whether to make contributions to a cash ISA or a stocks and shares ISA.

Due to rising interest rates, cash savers have seen respectable returns in recent years. Moneyfactscompare . co . uk reports that the average cash ISA rate for the 12 months ending in February 2025 was 3point 8 percent.

The 3.73 percent rate from the previous year and the 1.71 percent rate from the year prior were both lower than this.

That amount has been more than tripled by the average stocks and shares ISA has returned, though. According to Moneyfactscompare . co . uk, which examined the Lipper fund sectors, the average stocks and shares in the ISA returned 11point 86 percent between February 2024 and February 2025.

"It's interesting that, even at the high level of interest rates available last year, investing in markets was better rewarded than holding cash over this period," Iain Barnes, chief investment officer at the wealth manager Netwealth, tells BFIA.

"This better performance isn't unusual," he adds. A diversified portfolio of riskier investment assets frequently outperforms cash, even though we wouldn't advise investing for just a single year. Stocks and share ISAs probably capture a wide range of underlying exposures. More significantly, the performance gap widens over time, meaning that investors are typically rewarded if they can commit to a longer investment horizon.

Why did ISAs for stocks and shares perform better than ISAs for cash?

The analysis conducted by Moneyfactscompare . co . uk examines over 40 Lipper fund sectors. It concluded that "financial and financial innovations" was the best-performing sector, meaning that an investor could have received a whopping 3474 percent return if they had only invested their ISA in that area.

Over the last 12 months, North American, Japanese, and UK equity income generated robust growth of 24 percent, 10 percent, and 14 percent, respectively.

On the other hand, Latin America had the worst performance, declining 1115%.

According to Barnes, "global economies proving more resilient to high interest rates than many people imagined, and markets generally performing well in response" was the reason for stocks and shares ISA's superior performance.

He continues: "Amid constant political clamor, equity markets are rising, typically due to developments in the United States. The expansion of the group of highly successful technology mega companies based in the United States to other parts of the market, which have been less popular in recent years, is encouraging.

How does this year's outlook look?

Stocks and share ISAs might do better in the upcoming year, especially in light of declining cash ISA rates.

Stock markets will face their own difficulties, though, including sluggish economic growth brought on by international trade and fiscal policies, as well as obstinate inflation.

"In the end, stock markets must determine if the present underlying strength of businesses' expanding profits can counterbalance the noise we all hear in the daily newsflow," Barnes says.

After recent years of strong performance, some market segments are pricey, but we advise constructing a diversified portfolio rather than speculating about where the best returns will be found. Even the bond markets, whose returns have been poor lately, are currently offering competitive yields that will rise when cash rates decline. In short, we anticipate that despite the risks that lie ahead, investors will continue to reap the rewards of their investment in the years to come.

Do I need to move to an ISA for stocks and shares?

It's crucial to note that investing carries a higher risk than holding cash and that past performance does not necessarily predict future performance.

"Cash ISAs still have their part to play for customers, particularly the more risk averse," says Rachel Springall, a finance expert at Moneyfactscompare . co . uk, although savers may be interested to learn that stocks and shares ISA growth outpaced cash ISAs over the past 12 months.

The government's decision to freeze income tax thresholds, she continues, "makes cash ISAs more appealing because more savers will be in the higher-rate tax bracket, thereby reducing their personal savings allowance from £1,000 to £500.

When deciding between an ISA for cash and one for stocks and shares, the most important consideration is whether you are saving for the long term or the short term, according to Laura Suter, director of personal finance at the investment platform AJ Bell, who speaks to BFIA.

"If you are putting money aside for an emergency fund, which is usually three to six months' worth of expenses, then a cash ISA is a good option," she explains. It offers interest that is tax-free while keeping your money accessible.

However, given that markets tend to rise over time and outperform cash, despite short-term fluctuations, an ISA for stocks and shares may be a more effective option if you're looking at medium- to long-term goals, such as saving for retirement alongside a pension, a down payment on a home, or future home improvements.

Around three million people have more than 20,000 in a cash ISA without also holding an ISA for stocks and shares, and more than one million of them have more than 50,000, according to Suter.

The question of whether these "cash-heavy savers are missing out on long-term stock market returns" is so raised, she says. According to the Barclays Equity Gilt Study, which looks at data going back to 1899, UK stocks have a greater than 90% chance of outperforming cash returns over a ten-year period.

That's not to say that carrying cash is always a bad idea, Suter continues. The assurance that their money is protected from market swings is preferred by some people. However, it ought to be a deliberate choice as opposed to relying solely on cash and mindlessly hoarding it.