I’ve always said Cash ISAs are a lousy idea, and they’re getting lousier. They might sound good, as you don’t have to pay a penny in tax on any interest you get, but have you seen the actual rates on offer?
I’ve just done a check on currently available Cash ISA rates, and they’re falling. My search isn’t exhaustive, as I’m really just looking at what the various comparison sites come up with.
But the best easy-access rates are topping out at around 1.46% these days — there were some 1.5% ones not so long ago, but they seem to have disappeared. Anyway, that’s about the best you’re likely to get if you want access to your cash on demand and without penalty.
Fixed period
You can get slightly better deals by agreeing to lock up your money for a fixed period. But 2.3% is the best I can find today, and you can only get that by agreeing to a five-year fixed period.
Should you want your money out before the time is up, the penalties vary by provider. But there’s a good chance you’ll lose around a year’s interest. Oh, and they tend to have higher minimum investments too — one of the 2.3% ones I found requires a minimum of £15,000.
They’re asking us to stump up at least £15,000 and tie it up for five years to earn such a pitiful reward?
Those maximum 2.3% offerings with their onerous restrictions are offering returns that only just beat inflation. The rate has dropped a little, to an annual rate of 1.9% in May, so that’s about 0.4 percentage points ahead — not really a recipe for making you a millionaire.
Inflation
And at 1.9%, inflation is ahead of those top easy-access rates of 1.46%. So those Cash ISAs are paying interest rates below inflation, meaning you’re guaranteed to lose money in real terms. Even with no tax, that’s not much of an incentive, to me.
Yet still, people continue to pile their money into Cash ISAs. The total number of ISAs has been falling since 2011, but in the 2017-18 year, UK savers and investors put money into 10,815 ISA accounts. Sadly, 72% of those were Cash ISAs, so very few people are making the most of their allowance by going for what I reckon is by far the best option.
Stocks and Shares ISA
For me, the benefit of being able to invest up to £20,000 per year and not pay any tax on the profits are wasted if we don’t go for the one with the greatest potential, a Stocks and Share ISA. It’s the only kind I’ll consider and, along with my SIPP, it’s my way of building for a better retirement than my State Pension is ever going to provide.
You might think it’s risky, but over long periods of 10 or 20 years or so, shares are likely to beat a Cash ISA hands down. Over the very long term, the UK stock market has provided an average total return (including share price movements and dividends) of 8% per year.
Every £100 you invest in a Stocks and Shares ISA at that rate of return, and reinvesting all your dividends, would turn into £18,000 in 10 years. And £57,000 after 20 years.
