The Bank of England put interest rates up for the 14th time in a row last week, nudging them from up by 0.25% to 5.25%. As this rate is linked to the amount I can earn in savings accounts, one question is on my mind: is a Cash ISA likely to be more lucrative than a Stocks and Shares ISA?
Here’s the return compared to the average of the UK stock indexes the FTSE 100 and FTSE 250.
| Cash ISA | FTSE 100 | FTSE 250 | |
| Return | 5.25% | 7.2% | 10.6% |
Let’s start with the Cash ISA. The return is lower than for stocks and shares – which are based on historical averages – but does mean far less risk.
I can’t lose what I’ve saved in this type of account and come rain or shine I will get whatever the current interest is, so it’s a safe place to park some cash. But I’m looking at what I can earn, and in that regard, I see two big problems here.
Firstly, interest rates change all the time. It’s not like I can lock in my Cash ISA so that I earn that much for the next 10 years. Instead, what I actually get depends on what the Bank of England does. And with its target for inflation being around 2%, I’d expect lower interest rates over the long run.
Rates are linked to inflation. And if inflation is higher than the interest rate I can get, I’m actually losing money in real terms.
ISA return
Because the two rates are linked, a Cash ISA will likely never allow me to earn much of anything, in real terms at least.
A Stocks and Shares ISA, on the other hand, is a different kettle of fish entirely. With this account, I invest in a company. What I get back depends on how the company does.
For example, if I’d put £10,000 in Rolls-Royce at the start of 2023, then it would have grown to £22,018. But if I’d put it in at the start of 2022, it would have decreased over the year to £7,585. These ups and downs are a fact of life with stocks.
That said, they do tend to pay out more. The FTSE 100 historical return looks a lot higher than what I’d get in a Cash ISA. It makes sense, as I’m putting my money into global corporations like Unilever and Shell so when they make money, I can too.
The FTSE 250 return is even higher still. The smaller companies on this index tend to be more UK-based, like Greggs or J D Wetherspoon. And because of their size, they have more room to grow, which partly explains the better returns.
A danger
I will point out that there’s a danger in focusing on historical returns. Looking at the past is probably the best measure we have for predicting future returns, but it’s not guaranteed. A future crisis or war might make our past economic growth look like a distant thing.
To answer the question though, I think a Stocks and Shares ISA is still far better for earning money. A Cash ISA is a good low-risk option, but because it still offers a lower return than inflation, I see it as a poor place to earn money.
