I’m cheered by the fact that, in the 2017-18 tax year, 10.8m UK adults subscribed to an Individual Savings Account (ISA), and they contributed a total of £69.3bn.
But what saddens me is that, of that number, 7.8m went for a Cash ISA, stashing away a total of £39.8bn. They’ll be lucky if they get as much as 1.5% interest per year, with many paying significantly less, and that doesn’t even match inflation. You’re unlikely to become a millionaire pensioner that way.
Poor interest
If you put £1,000 into a Cash ISA with 1.5% interest per year, it will grow to £1,161 in 10 years. But UK inflation is running at 2.3% at the moment, eating into the spending power of your cash. If the inflation rate stays like that, things that cost £1,000 to buy today would cost you £1,255 in 10 years’ time – so even with your conscientious saving, you’d be able to buy less with your money than you could today.
To put it another way, with inflation cutting the value of your money faster than your Cash ISA interest rate is boosting it, every £1,000 you save today will, after a decade, only be worth the equivalent of £925 in today’s money. And the more you save, and the longer you save it, the more you’ll lose in real terms.
It’s really no way to invest for the long term — and you’ll now understand why seeing all those people going that route with their ISA money makes me feel so sad.
Shares are better
What’s the alternative? For me it can only be a Stocks & Shares ISA. You might think that’s risky, but shares are really only volatile over relatively short periods and, the longer you invest, the more likely you’ll come out ahead. If you’re investing for a couple of decades, I’d say you’re almost certain to beat a Cash ISA by a mile. But by how much?
The returns you should expect to earn from investing in UK shares varies depending on the timescale you examine, and there’s quite a bit of short-term variation. But, according to the Barclays Equity-Gilt study, over the past 119 years the UK stock market has provided average annual returns of 4.9% above inflation.
If those returns persist, every £1,000 invested today would be worth £1,613 in 10 years’ time — in today’s money. You’d be £613 ahead rather than looking at an effective loss of £75 from a Cash ISA.
Today’s market
OK, the UK stock market has been through a weak decade. But though share prices might not have performed brilliantly recently, dividends have been growing, and the FTSE 100 is currently on an expected yield of 4.5%. That’s 2.2% above inflation, and would grow your £1,000 into £1,243 in 10 years’ time, still in today’s money. Perhaps not as good, but still way better than a Cash ISA — and it’s dividend cash only and doesn’t include any share prices gains, which you’re very likely to get too.
That’s why my strategy for long-term investing is to go mainly for solid dividend-paying shares in the FTSE 100, buying them in a Stocks & Shares ISA (or a SIPP), reinvesting all my dividends, and watching it grow until I retire.
