Is the belief that Cash ISAs provide ‘safety’ for savers and their funds the biggest misconception in the realm of personal finance?
Generally speaking, citizens tend to think that locking their hard-earned money up with one of the high street’s trusted banks or building societies is safe as houses, with the protection of the government’s Financial Services Compensation Scheme (which safeguards sums of £85,000 or less) adding an extra layer of security.
On paper, it’s true that the money you stash in a Cash ISA will still likely be there if you dump it and go back in 30 years to pull it out. But I can more or less guarantee that the real-world value of that cash, i.e., what that paper currency will actually allow you to buy in three decades’ times, will be a lot less than it is today.
This reflects the impact of inflation, of course, that mysterious force which drives prices higher over time. And some simple research shows why. Right now, the best instant-access Cash ISA offers an interest rate of just 1.35%, according to price comparison website comparethemarket.com. By comparison, consumer price inflation (or CPI) currently sits at 1.5%, eroding the value of any money currently locked in one of these accounts.
2020 vision
And it’s unlikely that things will get any better in 2020. If anything, those opening a new Cash ISA a year from now could find themselves having an even worse selection of products to pick from.
Why? Well, toughening economic conditions in the UK mean that noises from the Bank of England on possible interest rate cuts are becoming louder. And any benchmark reduction from Threadneedle Street would likely see Britain’s lenders slash the rates on their savings accounts as a result. Savers need to remember, too, that any reduction in rates will also raise inflation pressures, providing a double-edged sword that could increase the difference between Cash ISA rates and the CPI gauge even further.
Invest, don’t save
Why settle for locking your money in one of these wealth-destructive accounts when you can make better returns through share investing? Evidence shows that long-term investors in the share market can expect to make annual returns of 8% to 10%, smashing that 1.35% interest rate currently offered up by Cash ISAs to smithereens.
And there are a number of top FTSE 100 dividend shares that are great buys for risk-averse individuals in 2020. Gold miner Polymetal International, for instance, offers a whopping 4.8% dividend yield for next year, and its share price will probably rise as geopolitical and macroeconomic tensions drive prices of precious metals.
Utilities play National Grid is another terrific Footsie pick in these turbulent times, its role as guardian of keeping the lights on providing exceptional earnings visibility. This share yields a brilliant 5.5% and 5.6% for the years to March 2020 and 2021 respectively. Or how about weaponsbuilder BAE Systems? This stock yields 4.3% and could well see its share price boom as investors pile into the perceived safe haven that is the defence sector.
If you want to make the sort of money to help you live a comfortable retirement it’s clear, then, that investing in the share market is a much better idea than dumping your savings in a destructive Cash ISA. And there’s an abundance of brilliant stocks out there to help you do just that.
