Over a third of investors hold uninvested cash in their stocks & shares ISA

With concerns over market volatility, which investors are holding cash in stocks and shares ISAs? And how can they protect against a market downturn?

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Today is the last day to use or lose this tax year’s ISA allowance. However, nearly 40% of investors are leaving their stocks and shares ISA contributions in cash, according to Hargreaves Lansdown. This is the highest level in three years, and nearly 10% more than in 2020.

Stock markets have been turbulent in 2022, with concerns over soaring inflation, increasing interest rates and war in Ukraine taking their toll. Emma Wall, head of investment analysis at Hargreaves Lansdown, comments that it’s “hardly surprising, therefore, to see investors are reticent to take the plunge with their ISA.”

She advises that nervous investors “can park [their] allowance in cash and decide where to invest once the outlook is clearer.” So what type of investors are choosing to hold cash in their ISAs? And which investments might offer a lower-risk alternative?


Who’s holding cash in their stocks and shares ISAs?

Unsurprisingly, lifetime ISA (LISA) holders are the most risk-averse, with 63% leaving their money in cash, according to Hargreaves Lansdown. If LISA investors are planning to buy a house in the next few years, they are less likely to risk a stock market downturn hitting the short-term value of their LISA.

LISAs are available to 18 to 39-year-olds who want to save a deposit towards their first home or retirement. You can contribute up to £4,000 a year, with the government adding a cash bonus of 25% (up to £1,000). You can invest your LISA in cash or stocks and shares. However, any contribution towards your LISA is deducted from your £20,000 overall ISA allowance.

In second place are junior ISA (JISA) investors, with 42% of JISA customers choosing to leave their deposits in cash. This is interesting given that junior ISAs tend to be longer-term investments as funds can’t be withdrawn until the child’s 18th birthday.

The annual limit for JISA contributions recently doubled to £9,000. Anyone can contribute to a JISA, but it must be opened by a parent. Children can invest any proportion of their allowance in a cash JISA and/or a stocks and shares JISA if they wish.

Finally, 37% of Hargreaves Lansdown’s main ISA customers left their contributions in cash. This has risen from around 30% in the last two years, reflecting investors’ current nervousness about market volatility.

You can contribute £20,000 per year to an ISA with any income or gains being tax free. As with a JISA, you can invest in both a cash ISA and a stocks and shares ISA in a single tax year.

Why not open a Cash ISA instead?

Stocks and shares ISAs have historically delivered better returns than cash ISAs. According to Moneyfacts, the average stocks and shares ISA delivered a return of 13.6% in 2020-21, compared to 0.6% for the average cash ISA.

Looking over a longer time period, research by IG shows that the FTSE 100 has achieved an average annual return of 7.8% since 1984. This includes the stock market crashes on Black Monday, the collapse of the dot-com bubble and the global financial crisis in 2008.

The current inflation rate is over 6%, and it’s forecast to rise further to 8%, according to Bank of England forecasts. Moneyfacts.co.uk reports that one of the highest easy access cash ISAs currently pays 0.8%. At current inflation rates, you would lose over 4% in real terms each year. Stocks and shares ISAs have greater potential to provide an inflation-beating return.


How can you protect your ISA from market volatility?

You can leave your ISA contributions in cash in your stocks and shares ISA. This will allow you to “gain the benefits of this year’s tax wrapper,” according to Emma Wall. However, she warns that “timing the market perfectly is near impossible, however, so waiting for total certainty can mean missing out on gains.”

Hargreaves Lansdown recommends these three approaches for protecting your ISA against a market downturn:

  1. Drip-feeding your contributions by setting up a monthly direct debit: this allows you to benefit from pound-cost averaging as you pay lower prices during a market downturn.
  2. Diversification: Emma Wall advises that “a well-balanced portfolio is the best way to combat market volatility, and should offer exposure to a mix of higher-risk assets, such as equities, alongside lower-risk assets, such as bonds.”
  3. Consider capital preservation funds, such as strategic bond funds, and multi-asset funds with a cautious approach: these funds aim to deliver modest growth while protecting your investment from downside risk.

Finally, if you’re trying to choose an ISA provider, our experts have compiled a list of our top-rated ISA providers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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