Picking a Cash ISA is one of the worst mistakes that investors can make. It’s gospel here at The Motley Fool that, while these products certainly have their uses, like allowing savers to access emergency funds as and when they need them, these cash-based ISAs offer little in the way of helping citizens make a tidy nest egg for retirement. Quite the contrary, in fact.
Say I was to put my excess capital into the best-paying instant access product on the market, currently the Santander 123 eISA which offers an interest rate of 1.5% AER (available only to 1|2|3 current account holders or via Santander Select product). Critically, the rate on offer lags behind the rate of inflation in the UK — the most recent CPI gauge for February clocked in at 1.9% — meaning that the value of your money is actually eroding over time.
Cash vs stocks
Placing your hard-earned money into one of those low-yielding accounts actually delivers a double blow to savers. As well as those aforementioned inflationary effects, choosing one of those Cash ISAs over an equivalent stocks and shares-based product means that you’re depriving yourself of the chance to enjoy some of the juicy returns that equity markets can offer.
Let me be clear: participating in the stock market is an unpredictable endeavour where asset values are prone to swings on the back of sudden geopolitical and macroeconomic events, as well as unpredictable (and often unfathomable) changes in trader and investor sentiment. That said, it’s been proven time and again that share markets can make investors a packet over a longer time horizon (say five years or above).
Don’t take my word for it. Instead, consider latest data from Scottish Friendly showing that, over the past 20 years, Cash ISA savers have received annual returns of 1.3% after inflation and fees. This lags far behind the 2.9% yearly return that investors in Stocks and Shares ISAs have been delivered.
The proof is there!
Because of the low-interest-rate environment of the last year, Scottish Friendly announced that “Cash ISA savers who maxed out their ISA allowances every year [since 1999] have earned on average £41,474 less than those who invested in the stock market.”
According to the investment product provider, individuals who maxed out their annual Cash ISA limit would have made on average £153,191 by now. By comparison, those who invested their money in the FTSE All-Share index via a Stocks and Shares ISA (with average annual charges of 1.4%) would have made £194,665.
As Kevin Brown, Saving Specialist at Scottish Friendly wisely commented, the extra capital that one of those stocks-based products has generated “could allow you to retire earlier, help a loved one onto the housing ladder or even to fund a holiday of a lifetime.” Fresh proof if ever it was needed that if you want to make a tidy packet, investing in equity markets is the way to go about it. So forget about those paltry Cash ISA rates and go fishing for great returns elsewhere.