Forget a Cash ISA! I’d invest £20,000 in a Stocks and Shares ISA to earn passive income for life

If I had a £20,000 sum to invest, I think a Stocks and Shares ISA is a far better option for passive income than a Cash ISA. Here’s why.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Bank of England raised interest rates to 4% last month, their highest level for 15 years. And even with these higher returns, Cash ISAs still seem like a terrible deal to me. If I wanted to build passive income from my savings, I’d invest in a Stocks and Shares ISA instead. Here’s why.

42p interest a month

Several years ago, I opened a Cash ISA after saving a few pennies from my first real job. I wanted to be smart about my money, invest for the future, and maybe start building up enough cash for a deposit to buy my first home. 

I got a shock when I opened my online banking account after the first month. My Cash ISA, which had maybe £3,000 deposited, gave me back only 42p in interest for the month. I felt so disappointed. Not even a tenner a year. How would that help me save for a house deposit?

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

The poor returns were partly due to the low interest rates back then. Fast forward to 2023, and we have a 4% interest rate. So are Cash ISAs a good deal now?

Cash vs stocks

An article published in The Guardian last year showed that only two out of 233 savings accounts passed on the full interest rates rise to customers. Even now, the highest rate I can find on a Cash ISA is 3.1%.

When I purchase shares in a Stocks and Shares ISA on the other hand, it’s a much more even playing field. I get the full returns minus a one-off trading fee. And with historical returns in British large-caps on the London Stock Exchange being around 8%-10%, I feel the gains are much more lucrative too. 

Let’s compare the returns of a Cash ISA and a Stocks and Shares ISA with an initial £20,000 stake.

Cash ISAStocks and Shares ISA
Percentage Return3.10%9%
Starting Amount£20,000£20,000
10 years£27,140£47,347
20 years£36,830£112,088
30 years£49,979£265,354

The stark difference between how much 9% and 3.1% earns – over £200,000 in interest – shows clearly why I think owning stocks is a better way to build long-term wealth. 

There are more risks involved with investing in stocks. Historical returns may not be the same as future performance. And an advantage of Cash ISA is that returns are guaranteed, which makes them much more suitable for short-term saving.

A passive income source

At some point, I will want to withdraw funds to create a passive income. A useful phrase here is ‘safe withdrawal rate’. This is basically how much I could take out while keeping my original sum more-or-less intact. Studies have shown 4% to be safe over multiple-decade timeframes.  

The 4% safe withdrawal rate of that 30-year figure of £265,354 offers a £10,614 income per year. That’s nearly £900 a month from investing in stocks, an amount higher than the state pension. I’d like that as an extra income source over the long term. 

I’ve been working towards a future income like this for a few years now and the reality is not as cut and dry as the example above. But by ‘drip-feeding’ spare cash into stocks and investing in quality companies? I’m seeing real progress towards what I hope will be a lifelong passive income.

Should you buy Barclays now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

At $184, I reckon this S&P 500 juggernaut is still on sale

Our writer sees Amazon (NASDAQ:AMZN) as an attractive S&P 500 stock to consider while it is priced 23% lower than…

Read more »

Investing Articles

Cheap FTSE 250 shares to consider buying right now?

These FTSE 250 growth stocks had weak starts to 2025, and face short-term uncertainty. But their long-term valuations could be…

Read more »

Investing Articles

As stocks dive, is this a rare chance for ISA investors to build generational wealth?

Globally, stocks have pulled back significantly following the announcement of tariffs by the US president. Is this an opportunity for…

Read more »

Investing Articles

2 ultra-cheap shares to consider right now!

These cheap UK shares offer considerable growth and income potential over the long term, reckons our writer Royston Wild.

Read more »

Investing Articles

Legal & General Group shares go ex-dividend on 24 April – time to grab that 9% yield?

Harvey Jones holds Legal & General Group shares and is already looking forward to the next bumper dividend from this…

Read more »

Young female analyst working at her desk in the office
Investing Articles

3 FTSE 100 dividend stocks to consider buying while they’re on sale

Paul Summers reckons canny investors should think about snapping up quality, dividend-paying stocks while they're going cheap

Read more »

Investing Articles

2 cheap passive income shares to consider buying right now

The passive income we can earn from the UK stock market looks set to climb this year, and could even…

Read more »

Investing Articles

Down 15% in a month, this FTSE 100 dividend share offers investors a stunning 10.8% yield

Harvey Jones plucks out a FTSE 100 dividend share that offers frankly a quite staggering yield and is now a…

Read more »