It’s impossible to overstate the popularity of the Cash ISA. British savers hold a staggering £294bn in the tax-free savings product. Today, it’s possible to get interest rates up to 4%. So what’s not to like?
A few things, actually. Too many people leave too much money sitting in their Cash ISAs, for far too long. While it’s a brilliant place to put short-term savings, it doesn’t work so well over the longer run.
Unless you keep shifting your money around to take advantage of the latest best buy rates, the interest rate is likely to dwindle over time. You can soon end up getting less than inflation, meaning the value of your money shrinks in real terms.
Do stocks and shares outperform?
Typically, Britons put more money into Cash ISAs than the Stocks and Shares ISA. Equities make them nervous. Despite that, total Stocks and Shares ISA holdings are much bigger at £430bn. Why? Because they deliver far superior returns.
Over the last decade, the average Cash ISA paid just 1.21% a year, financial website Unbiased says. The average annual return on a Stocks and Shares ISA, with dividends reinvested, was 9.64%. That’s almost eight times as much. That gap widens massively over time, thanks to the magic of compound growth.
For the sake of argument, let’s assume these returns continue for the next 10 years. If someone had £19,999 in their Cash ISA today, and it grew at 1.21%, by 18 June 2036 they’d have £22,555.
By contrast, a Stocks and Shares ISA would turn the same sum into £50,199. None of these figures are guaranteed. But it’s a cavernous gap and it would grow over the years as this table shows:
| Term | Cash ISA | Stocks and Shares ISA |
| 10 years | £ 22,555 | £ 50,199 |
| 20 years | £ 25,438 | £ 126,005 |
| 30 years | £ 28,688 | £ 316,285 |
Cash builds wealth at a snail’s pace. Equities fly, although with lots of ups and downs along the way.
How well has Tesco done?
One reason they do well is that FTSE 100 shares like grocery chain Tesco (LSE: TSCO) offer both share price growth and dividend income.
The Tesco share price is up 15% in the last year, and during that time it has paid income of 3.2%. But the real benefits come over the longer run. Over five years, Tesco shares have more than doubled, rising 113%.
Typically yielding around 4% in that time, the total return should be heading towards 140%, with dividends reinvested. No savings account could match that.
The Tesco share price has had a terrific run but I suspect it might slow for a while. The cost-of-living crisis isn’t just hitting shoppers, it’s squeezing grocery margins too. As do supermarket price wars, a constant feature of this highly competitive sector.
That’s why it’s always important to buy shares with a long-term view. Building a balanced portfolio FTSE 100 stocks will deliver a far superior return than cash over time. Tesco shares are worth considering as a first step. There are plenty more stock opportunities out there and I’ll be exploring them. What I won’t be doing is leaving my money to idle in cash.
Should you invest £5,000 in Tesco Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco Plc made the list?
Harvey Jones does not hold any positions in the companies mentioned.
