The Cash ISA is hugely popular, and with good reason. It’s like a bank account, but the interest is free of tax. It’s a great home for short-term savings, but there’s a problem. It’s a poor way to build wealth for the long term.
The Stocks and Shares ISA is a much better option for those looking to build wealth over the years, with retirement in mind. While equities can be volatile in the short term, in the longer run they’re much more rewarding, as figures from advisory service Unbiased show.
While it’s possible to get Cash ISA rates of around 4% (by shopping around), they tend to slide over time. Over the last decade, the average Cash ISA paid just 1.21% a year. Over 10 years, that would have turned £5,999 into £6,767. In real terms, its value’s likely to have fallen due to inflation.
Do stocks and shares perform better?
By contrast, the average Stocks and Shares ISA returned 9.64% a year. This would have turned the same £5,999 into £15,058. And as my table shows, the benefits would multiply over time:
| Term | Cash ISA | Stocks and Shares ISA |
| 10 years | £ 6,767 | £ 15,058 |
| 20 years | £ 7,630 | £ 37,797 |
| 30 years | £ 8,606 | £ 94,875 |
Returns on the Cash ISA creep up only slowly, but equities compound exponentially. These figures assume all dividends are reinvested straight back into that ISA.
The Cash ISA has its uses, but also limitations. The government thinks we leave too much money sitting in them, and is nudging savers to shift into shares. It’s doing this by cutting the £20,000 Cash ISA contribution limit to £12,000 from next April for the under-65s. The Stocks and Shares ISA allowance remains £20,000 for all.
Right now, a popular way to use your Stocks and Shares ISA is to build a portfolio of FTSE 100 shares, offering both potential share price growth and dividend income. Stock markets are a little volatile today, but they always are. The ups and downs are the price we pay for the long-term wealth-building power of markets.
Are Lloyds shares worth considering?
One stock that’s done brilliantly for me lately is Lloyds Banking Group (LSE: LLOY). Lloyds, along with the rest of the big banks, were hammered in the financial crisis. But it’s pieced itself back together, and the shares have been flying. They’re up 110% over five years, with dividends on top.
During that time, it’s typically yielded around 5%, beefing up the total return. The shares have wobbled since the start of the Iran war. If the cost-of-living crisis returns, that could hit demand for mortgages and drive up bad loans, squeezing profits. So that’s a risk to consider. Plus there’s a chance the shares could idle for a while, following such a strong run. These things tend to come in cycles.
But I think Lloyds is worth considering as a solid ISA portfolio building block. You should aim to balance it with a range of FTSE stocks to spread risk and turbo-charge your overall growth potential. And avoid leaving too much in cash.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group Plc made the list?
Harvey Jones owns shares in Lloyds Banking Group.
