The amount of money sheltered in individual savings accounts (ISAs) surged before the pandemic, latest government figures show1. In the 2019-20 tax year, 13 million ISA accounts attracted a total of £75 billion – up from the £68 billion subscribed to 11.2 million accounts in the previous tax year.

That savers set aside more money ahead of the pandemic can only be good news, and the trend is likely to have accelerated during lockdown as those lucky enough to have some disposable income saved what they would otherwise have spent.

Look beneath the headline figures, however, and some interesting – and potentially worrying – trends emerge.  Nearly three quarters of subscriptions, or 9.7 million, went into cash ISAs – more than three times the 2.7 million contributions to stocks and share ISAs2.

The figures also break down ISA subscriptions by gender for 2018-19, showing that more women than men contributed to an ISA – at 5.4 million against 4.9 million for men. However, women were more likely to contribute to a cash rather than a stocks and shares ISA, with 80% of subscriptions going into cash compared with 71% for men.

The average value of male and female ISAs also reveals something of a gender gap, with men having an average of £30,089 in ISAs in 2018-19 compared with only £27,098 for women.

The popularity of cash ISAs is, of course, no bad thing. Having some cash set aside for emergencies is good financial planning. However, there are dangers in relying too heavily on cash if you are trying to meet long-term savings goals. This is because of the damaging effects of inflation.

So how much cash is too much?

Emergency planning

I, in common with many financial planners, generally recommend you have enough cash to cover three months of outgoings, but the exact amount will depend on your circumstances. It can make sense to hold some of this contingency cash in an ISA because you won’t pay income tax on the interest and many accounts give you easy access3.

However, holding cash is not without risk because of the long-term effects of inflation – or rises in the cost of living. As the cost of goods and services increases over time, the value of the money you have put aside – in terms of what it can buy – will erode gradually.

How cash can lose its value

Inflation is a lot lower now than the double-digit levels of the 1970s and 1980s – but it is currently picking up as economies reopen following the Covid-19 pandemic and as consumer demand returns.

Headline inflation in the UK accelerated to 2.5% in the 12 months to June, up from 0.7% in January4. Core inflation (which excludes volatile food and energy prices) is also starting to rise. Our economists think that any rise in inflation above the Bank of England’s 2% target will be transitory, as outlined in a recent blog. But even at these levels, inflation can still have a sizeable impact on your savings.

If inflation remained at 2% a year for 20 years, the value of £100 of savings would be eroded over time to just £67.30. With savings rates on cash accounts at rock-bottom levels, it is unlikely that your savings will grow enough to offset the effect of inflation.

The chart below illustrates this. It shows the return from deposit rates (using the rate at which banks lend to each other as a benchmark), both before and after inflation. The red line demonstrates how the return on cash has been severely eroded by inflation over the past 20 years.

Cash returns before and after inflation

Growth of £10,000 from 31 December 1998 to 31 May 2021. Cash returns illustrated by ICE Libor 3-month sterling rate (GBP); inflation by the UK Retail Prices Index.

Source: FactSet as at 21 June 2021. Past performance is not a reliable indicator of future returns.

That is why, for longer-time horizons, it can be worth considering a stocks and shares ISA to give your money a chance of keeping pace with inflation.

Of course, there is also a risk of losing money. Share prices can go down as well as up, and you may get back less than you put in. But investing in stocks and shares over longer time horizons gives you more chance of riding out the ups and downs of the stock market.

Mind the ISA gap

So why do women seem more likely to opt for cash ISAs, potentially putting their savings at risk from inflation?

To some extent, you have to look at savings at the level of the household rather than the individual.  I often find that couples will balance each other out – if one is taking more risk with their investments, the other may counter-balance this with a focus on cash.

I also find that women are particularly persuaded by the argument for having short-term money in cash and can be very disciplined about saving regularly to build up a contingency cushion. However, they may need more information about the risks of investing before they are persuaded to take their first steps into the stock market.

That is why it’s important to understand that cash savings are not risk-free and that, if you take a long-term, balanced approach to investing (by holding an appropriate mix of shares and bonds to spread your risk), it can help you to meet long-term goals such as saving for a child’s education or for retirement.

The very discipline that I have seen many women apply to their cash savings is also good practice when investing in the stock market, in terms of saving regularly to benefit from the power of compounding. This is where your money builds up over time because you earn a return not just on the money you invest, but also on the previous year’s returns.

Compounding also applies to the interest you earn on cash savings, of course – but with cash returns so low, the compounding effect from investing in the stock market has the potential to deliver stronger returns over time.

And as we say in our four investment principles, the most successful long-term investors are often the most disciplined – those who don’t let emotions guide their investing, resist the temptation to tinker with their investments too much and have the self-control to stay the course.

In other words, some of the factors that may hold women back from the stock market could in fact make them highly successful investors.


1 Source: Annual savings statistics, HM Revenue & Customs, 8 June 2021. Annual savings statistics - GOV.UK ( Total amounts subscribed to ISAs, number of ISAs and total market value of ISAs updated for the 2019 to 2020 tax year (to 5 April 2020). Number of adults subscribing to an ISA and market value of ISA funds by income, age, sex and region updated for the 2018 to 2019 tax year (to 5 April 2019).

2 The remaining subscriptions were into lifetime ISAs and innovative finance ISAs.

3 In the 2020-21 tax year, the maximum you can save in ISAs is £20,000.

4 Source: Consumer Prices Index (CPI), June 2021, Office for National Statistics.

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

Other important information:

The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

This article is designed for use by, and is directed only at, persons resident in the UK.

If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

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