Retirement savings: forget a Cash ISA, I’d buy dirt-cheap FTSE 100 stocks instead

The returns available on a Cash ISA could significantly underperform those of the FTSE 100 (INDEXFTSE:UKX), thereby dampening your retirement prospects.

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.

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.

While the past is never a perfect guide to the future, the track record of cash and shares suggests that the latter is a much better place to invest your capital in order to retire early.

That’s especially the case at the present time, with interest rates being close to their historic lows and the FTSE 100 appearing to offer a wide margin of safety.

As such, there may never have been a better time to build a portfolio of large-cap shares. Pivoting from a Cash ISA to the stock market today could boost your retirement prospects through generating a larger nest egg.

Return prospects

At the present time, the outlook for UK interest rates remains relatively dovish. This means that the Bank of England is expected to only increase interest rates at a modest pace over the next few years, with concerns about the domestic economy and the global economy potentially causing them to adopt a cautious attitude.

This could mean that while Cash ISAs are a relatively popular product, they offer negative real-terms returns. Over the long run, this may mean that savings are unable to provide a passive income that can fund a lifestyle in retirement at a time when the State Pension age is expected to move higher.

By contrast, the FTSE 100’s return potential seems to be high at the present time. Its yield is more than twice that of the S&P 500, which indicates that the UK index could move much higher without being overvalued on a relative basis. And, with the FTSE 100 having recorded high-single-digit annualised total returns since its inception in 1984, its track record shows that it has the potential to build a large retirement fund for a range of investors.

Short-term challenges

The FTSE 100’s price level could be negatively impacted by a variety of risks in the short run. Among them are Brexit and a global trade war. While they may cause paper losses to be recorded for investors in large-cap shares, this is unlikely to be a problem if their time horizons are sufficiently long enough to allow a period of recovery. After all, the index has always posted higher highs following its bear markets.

This is in stark contrast to the returns that are available on a Cash ISA. Savers know that their cash holdings are set to deliver a negative real-terms return, which makes them an illogical place to invest excess cash.

Since inflation may remain higher than interest rates over the coming years, the difference in valuation between a FTSE 100 portfolio and a Cash ISA could widen by a surprisingly large amount. Therefore, with the index seeming to offer good value for money due to the risks faced by the world economy, now could be the right time to buy a range of large-cap shares.

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.

Peter Stephens 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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »