Cash ISAs remain wildly popular in the UK today. They’re simple and they provide a guaranteed return. What’s not to like?
Quite a lot, if you’re the British government at least. It’s why savers’ allowances will plummet to £12,000 per year from next April. That’s down from the £20,000 that Cash ISA limits users have enjoyed since 2017.
The change is designed to encourage Brits to invest instead of clinging onto cash. And though I don’t like the government’s ‘stick’ approach, if it means more people build long-term wealth with Stocks and Shares ISAs, it’s something I’d be happy to forgive.
As I’ll show you, seeking the security of cash can end up costing you a comfortable retirement.
Cash vs stocks
During the past five years, the average Cash ISA interest rate has been roughly 3%. At this rate, someone maxing out their £20,000 allowance each year would have £129,503 at the end of the period.
That’s not to be sniffed at. However, compared with the wealth many investors have generated with Stocks and Shares ISAs over the same period, it’s a reminder that ‘playing it safe’ can come at a huge cost.
Let’s say someone put £20,000 into a FTSE 100 tracker fund each year for the past five years instead. Based on the index’s 12.3% return (combining capital gains and dividends), that investor would be more than £37,000 better off than our cash saver, with a impressive £166,528.
Time to bin the Cash ISA?
Don’t get me wrong. Cash ISAs play an important role in helping investors balance their wealth based on risk and return. My fear is that too many people are over-reliant on cash savings. And this creates dangers of its own.
As Fidelity notes
While cash feels safe, it comes with a silent risk: that your money doesn’t grow at all.
This can see the real value of your savings pot eroded by inflation, and leave you with insufficient money for retirement. On the other hand, a carefully-chosen investment strategy can help you manage risk and target financial independence later on.
A 9% wealth opportunity?
Our Footsie-tracking exchange-traded fund (ETF) provides a perfect example of how to achieve this. Products like the iShares Core FTSE 100 ETF (LSE:CUKX) may fall when broader stock markets dip. But their diversified models can still provide robust and steady returns over the long term.
For instance, a FTSE 100 tracker is well diversified by geography, holding multinational shares (like HSBC, Rolls-Royce) along with ones that focus on specific regions (National Grid). They also provide exposure to a variety of sectors — think of companies as diverse as Diageo, Vodafone, BAE Systems, and AstraZeneca.
Finally, these Footsie trackers also contain a blend of growth, value, and dividend shares. The former two can surge in value during stock market rallies, while income stocks may provide solid returns even during downturns. The result? A smooth and substantial outcome across the economic cycle.
The FTSE 100’s 12.3% annual return since mid-2021 is high by historical standards. But even if the index manages a more typical 9% return in future, it will still significantly outperform any Cash ISA.
What income stock do we like better than Rolls Royce right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Royston Wild owns shares in HSBC and Diageo.
