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Cash Isas are paying the highest rates in a decade – here’s why you should ignore them

Piggy bank with money illustration
Piggy bank with money illustration

Cash Isas are paying the best interest rates for more than a decade – but financial advisers are urging savers to ignore them.

Cash Isas, including both fixed-rate and variable accounts, paid almost 3.4pc in March on average – the highest interest rate since the 2008 financial crisis, according to comparison site Moneyfacts.

Savers can now earn more than 4pc in annual interest by locking money into fixed-term Isas for 12 months or more. Just a year ago high-street banks paid as little as 0.1pc interest to customers.

It comes after global financial markets fell further in 2022 than in any other of the past 15 years, raising the question as to whether the investment risk is worth the return.

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But, despite the return of high-paying savings deals, financial advisers are still telling their clients to put their money into choppy stock markets this year.

This is for two reasons: experts believe investing delivers higher returns over the long term and predict the current attractive interest rates on savings deals to fall.

William Morris of Weatherbys Private Bank said saving money into cash Isas represented a “huge missed opportunity”.

This is because investing in the stock market over the long run typically delivers higher returns, despite periods of volatility.

The MSCI World index, a measure of global stock markets, has returned around 171pc over the past decade, generating annualised returns of more than 10pc.

The popular Vanguard LifeStrategy 100 fund, which tracks global markets, has returned 137pc over the same time period.

This translates into annualised returns of around 9pc.

This is more than double the rate savers can earn from the current top-paying fixed-rate cash Isa accounts.

“Keeping money in cash might feel like the canny thing to do right now… But for anyone who doesn’t need to spend it in the short to medium term – the next five years or so – it’s potentially a huge missed opportunity,” Mr Morris said.

“Yes, interest rates on deposits are higher. But so are the yields on bonds. And stock market valuations have come down markedly over the past year or so, leaving a bit of room for better prospective returns.

In short, there are sound reasons to expect investments in bonds and shares to do better than cash, beyond merely a karmic hope that the cosmos will reward risk-taking in the fullness of time,” he said.

Alice Haine of stockbrokers Bestinvest said this was especially true for those able to invest for many years, such as parents setting up Junior Isa accounts for newborns.

“There is great potential for parents to start saving into a Junior Isa for a child from the time they are born, with an annual allowance of £9,000. With history showing that over a period of 18 years, stock market investments tend to produce superior returns to cash.

“Even if a family puts just £100 a month into a Junior Isa, and assuming investment returns of 6pc, the pot would be worth £38,929 by the time the child turned 18, while at an average savings rate of 2.5pc it would be worth £27,300,” she said.

While savings rates are high at the moment, they are predicted to fall.

Expectations of further interest rate rises, which banks use to price savings deals, fell significantly this month.

However, saving in cash still makes sense for those looking for a place to keep their money in the short term.

This includes those building up rainy day reserves or those saving up for a house purchase within the next five years who would be advised to avoid stock market risk.

Ms Hain suggested splitting cash deposits between easily-accessible accounts for emergencies and fixed-rate deals which mean your money is locked away for a year or more, to take advantage of the higher interest rates on offer.

“Those with cash to invest but unsure what investments to make can load their account up with cash and earn interest while they take their time to make an investment selection – even if it is in the next tax year.

“This ensures those who want to take advantage of this year’s allowance don’t miss out on this ‘use it or lose it’ allowance,” she added.