The Cash ISA is hugely popular. Too popular, in my view. While it’s a great home for short-term savings and an emergency cash buffer, this is no place to build long-term wealth for retirement. For that, the Stocks and Shares ISA will do a much, much better job.
And it’s not just me saying that. The Treasury agrees. That’s why it’s planning to cut the Cash ISA allowance for the under-65s from £20,000 to just £12,000 next April. The Stocks and Shares ISA allowance will remain at £20k for all. Why is it doing that? To encourage more people to access the long-term wealth building capacity of stock markets.
Do equities really outperform cash?
Over the last decade, the average Cash ISA paid just 1.21% a year, financial website Unbiased says. By comparison, the average annual return on a Stocks and Shares ISA, with dividends reinvested, was 9.64%.
So £20,000 saved in the average Cash ISA would be worth £20,242 after one year. In the average Stocks and Shares ISA, it would grow to £21,928. That’s £1,686 more. I’ll admit that’s a slightly daft comparison. Over such a short time scale, the Stocks and Shares ISA could go anywhere. It could easily rise or fall by up to 20% or more. Cash won’t.
That short-term volatility is a price worth paying given the long-term wealth building firepower that shares bring to the table. Over the typical investment lifetime of 30 years or more, the difference is massive.
Given the above performance figures, the Cash ISA would turn £20,000 into £28,690. But the Stocks and Shares ISA would absolutely transform it into £316,301.
A popular way to invest is to buy a spread of FTSE 100 stocks, which offer both share price growth and dividend income. Insurer and asset manager Legal & General Group (LSE: LGEN) now offers the highest trailing yield on the entire blue-chip index, a stunning 7.6%. Any share price growth is on top of that. I bought it for my SIPP three years ago.
Do Legal & General shares have growth potential too?
Those dividends should ideally be reinvested while you’re of working age, to build your position, then drawn as income in retirement to top up your State Pension and any other savings you may have.
That dividend income should rise over time, which will help to protect its value against inflation. Over the last 15 years, Legal & General has increased its dividends by an average rate of 10.7% a year. This isn’t guaranteed though. The company has to generate enough cash to do that.
Sadly, Legal & General shares have disappointed lately. In fact, they trade at similar levels to a decade to go. But there are signs of a pick-up. Over the last year the shares have grown 12.7%. Combined with that trailing yield, the total one-year return is more than 20%.
Legal & General operates in a tough and competitive market. If we suffered a wider stock market crash, that could hit the value of the £1.2trn worth of assets it holds, reducing fee income. No stock is without risk. Yet I think the ultra-high income and the prospect of a share price recovery makes it worth considering today.
Should you invest £5,000 in Legal & General Group Plc right now?
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Harvey Jones owns shares in Legal & General Group.
