LETTER FROM THE FOUNDER: ISA vs Savings Account: What the Numbers Actually Say Over 20 Years

Most people choose a savings account because it feels safe. The money is there, it earns interest, and nothing alarming happens to it. That logic is understandable. But over a 20-year period, the gap between saving and investing can be so large that it is worth stopping to look at the actual numbers before making a decision.

The following uses illustrative figures based on historical averages. Past performance is not a reliable guide to future returns, and individual results will vary.

The savings account

Put £500 a month into a savings account at 4% annual interest, and after 20 years, you would have approximately £183,000. That assumes interest is reinvested each year and that the 4% rate holds. The problem is that it probably would not.

The 4% rate available in 2025 reflects a higher interest rate environment than the near-zero rates seen between 2009 and 2021. Over a 20-year period, an average closer to 2% is historically more realistic for easy-access cash. At that rate, the same £500 a month produces approximately £147,000.

The Stocks and Shares ISA

Now take the same £500 a month and put it into a Stocks and Shares ISA (a tax-free account where money is invested rather than held as cash), invested in a broad global index fund (a fund that tracks thousands of companies across the world).

Using a conservative 7% annual return to account for charges and variability, that £500 a month could grow to approximately £260,000 over 20 years. Compared with the 2% savings scenario, that is a difference of around £113,000.

That gap does not come from taking big risks or picking the right stocks. It comes from time, and from the way returns compound when they are reinvested and sheltered from tax inside an ISA wrapper.

Why the ISA wrapper matters

Inside an ISA, all returns are free of income tax and capital gains tax. Outside one, gains above £3,000 could attract capital gains tax when investments are sold, and dividend income above £500 could be liable for dividend tax. Both allowances have been cut substantially in recent years, making the ISA shelter more valuable than it has been for some time.

A note on risk

A Stocks and Shares ISA is not the same as a savings account, and the difference is not just about returns. The value of investments can fall as well as rise. Over shorter periods, stock markets can drop sharply.

The case for investing over saving is strongest over longer timeframes, typically five years or more. For money that may be needed at short notice, a cash savings account or easy-access Cash ISA remains the more appropriate home.

What to do next

Compare Stocks and Shares ISA providers by fee and features: investinginsiders.co.uk/best-stocks-shares-isa.

Find the best savings account rates currently available: investinginsiders.co.uk/best-savings-accounts-where-to-get-the-top-rates-of-interest

New to investing? The beginner guide covers the basics in plain English: investinginsiders.co.uk/a-guide-to-starting-your-investment-journey