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Cash versus investing: Stock market reigns supreme for the get rich slow approach

by LLB Editor
31st May 23 9:48 am

The Bank of England’s decision to increase interest rates for the 12thconsecutive time has put the savings versus investing debate back into the spotlight.

Savings rates have regained some lustre after a decade in the doldrums, so there are now more options open to savers and investors.

When it comes to wealth generation and financial resilience, cash savings for emergency spending and investments for the longer term are both important and each has a role to play.

New research by interactive investor, the UK’s second largest investment platform for private investors, illustrates the long-term potential of the stock market versus cash. The data covers a 35-year period in time where UK rates ranged as high as 13.88% and as low as 0.10%.

The platform looked at a scenario where the full annual PEP allowance had been invested annually since the launch of PEPs in 1987. This was then followed by the full annual ISA allowance each year since the launch of ISAs in 1999.  It was assumed that the investment mirrored the return of the FTSE All Share index over the past 35 years, with investments made on 6 April each year.

interactive investor found that the investment mirroring the performance of the FTSE All Share would have would have delivered an almost fourfold return, making you a hypothetical millionaire, turning total contributions of £377,760 into £1,370,224. This compares to £591,386 had the same amount been invested in cash, using one-month LIBOR rate as a proxy, in a PEP and latter ISA tax wrapper. The data covers the past 35 years to 5 April 2023.

Investing through an ISA (and formerly PEP) wrapper means savings and investments do not incur capital gains tax when sold, and no further tax is payable on any income or interest paid.

Over the past 35 years, the government has regularly increased the annual ISA allowance from £2,400 in 1987 – the PEP allowance – to its current level (£20,000). In April 1999, Chancellor Gordon Brown introduced ISA’s to replace PEPs with a limit of £7,000.

Get rich slow

This ‘get rich slow’ approach is not dissimilar to that taken by ii’s ISA millionaires, who at last count had an average age of 73, and most would have likely started their investing journey in PEPs before graduating over to ISAs.

The data is a thought-provoking illustration of the long-term potential of the stock market. And while it goes without saying that only the very fortunate few can afford to make full use of their ISA allowance, the data is still potentially inspiring for those with much smaller pot sizes.

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