Calling all cash ISA investors: 2 critical nuggets of information that you need to know

Royston Wild shares some important details that all cash ISA investors need to know about.

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.

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If you’re one of those people with capital locked up in an easy-access cash ISA, there’s a couple of pieces of information you need to know today.

Nugget #1: Rates are rising

First of all, so meagre are the returns on such accounts that any upswing in interest rates need to be exploited to their fullest. And rates have indeed perked up a bit in recent days.

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Paragon Bank, which was already offering one of the headiest interest rates on the market, late last week launched a new ‘Limited Edition Easy Access’ product offering 1.37% AER on savings between £1 and £100,000.

Not one to sit still, Leeds Building Society has also been raising rates by a decent margin and it is now offering 1.36% AER through its ‘Limited Issue Online Access’ cash ISA. The account can be opened with as little as £1,000 but balances must be kept above this level, otherwise the rate falls to just 0.05% AER.

Frequent savers may want to take a look at Vernon Building Society’s Regular Saver ISA and its 1.95% AER interest rate, too. A few caveats apply, however. For balances totalling £25,000 or more, the interest rate falls back to 1.45%, a maximum of £500 can be deposited per month, and the account doesn’t allow transfers from existing ISA accounts.

These rates still aren’t enough to get the pulse racing. Even if you’re prepared to lock your money up for a fixed period of time, potential returns aren’t exactly likely to prove stratospheric, either. A scan of price comparison website Moneysupermarket.com shows that the best five-year, fixed-rate cash ISA currently on the market is offered by Coventry Building Society with an interest rate of 2.3%.

Nugget #2: Better returns can STILL be found elsewhere

Interest rates on these cash products are clearly on the charge again, and investors need to keep their ear to the ground for further hikes as the competition among providers increases.

Still, one thing remains the same and always will. Relying predominantly on cash ISAs as a way to build your retirement nestegg can have a catastrophic effect on your savings. And this is particularly so now that inflation in Britain is beginning to run rampant again — August’s CPI reading of 2.7% certainly makes mincemeat of even the best-paying cash ISAs currently on offer today.

Cash-based products certainly have their place, but that these should predominantly only be used for holding emergency capital or funds that are only to be held for an extremely short period of time. Aside from the risks of capital erosion that rebounding inflation now creates, investors are missing out on some brilliant investment opportunities elsewhere by keeping their holdings in cash.

A Stocks & Shares ISA is a much more intelligent way of saving, we here at the Fool believe, as there are plenty of attractive companies to pick from even for the most risk-tolerant investor.

Take support services provider Bunzl. Its share price has risen 75% over the past five years and its exceptional defensive qualities allowing profits to keep on moving higher throughout the period. Dividends have risen 25 years on the spin, too, because of its solid earnings performance. And at current prices, the FTSE 100 firm carries a forward dividend yield of 2.2%, smashing the rates of those aforementioned easy-access cash ISAs.

Clearly cash ISAs have their place. But don’t be too reliant upon them… they can do serious damage to your wealth.

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Royston Wild 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.

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 considered, so you should consider taking independent financial advice.

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