Are you still making this classic retirement savings mistake?

Looking to secure a comfortable retirement? You’re very unlikely to get there if you do this.

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.

Making mistakes is somewhat inevitable when it comes to money. We buy things we don’t need or never use, perhaps getting into debt in the process. We shower cash on stuff we believe will bring us long-lasting happiness without recognising that the joy we get from new possessions quickly diminishes. 

Even when our goals are admirable — such as saving for a more comfortable retirement — the strategy being used is often less than optimal. I’d lump saving with a cash ISA firmly within the second camp. 

Based on recent research, however, it looks like many of us are still doing just that.  

According to HMRC, the share of cash ISA subscriptions as a proportion of all ISA subs was 72% in 2017/18. What’s more, the amount of cash plowed into these accounts actually rose (albeit only very slightly) to around £40bn.

The lure of cash

Don’t get me wrong — I understand why saving into this kind of account looks sensible to many Britons.

First, cash isn’t volatile like some assets. If you move money into a cash ISA at the start of the tax year, you can be sure that you’ll have the same amount by the end of the year (plus interest). In the fragile political and economic climate we’re in, that’s comforting, as is the fact that you can get access to your money whenever you want.

Second, saving into this wrapper means that you don’t pay any tax on any of the aforementioned interest you receive.

Problem is, these ‘advantages’ can be easily challenged.  

The bad news

For one thing, the level of interest on instant access cash ISA accounts remains paltry. The best you can hope for at the current time is 1.5% according to That’s below the savings rates of some current accounts.

That 1.5% is below inflation too. This means your money is losing purchasing power the longer it sits there. They don’t call it the ‘silent killer’ for nothing. 

The tax benefits are also questionable. Thanks to the annual savings allowance, most people won’t end up owing the taxman anything on the interest they receive anyway, even if it’s outside the ISA wrapper.

A better strategy

Now, having three to six months worth of expenses saved in cash is a great idea and can help pay for any unexpected costs that crop up. 

After this, however, it won’t come as a surprise that I believe those focusing on building a better retirement should be putting that money to work in a stocks and shares ISA. Not only do these accounts shield owners from income tax (on dividends), they also protect you from needing to pay capital gains tax on any profits you make.

Sure, the stock market can be volatile, but this shouldn’t matter to anyone investing for decades rather than days. Over time, equities have been shown to consistently outperform every other asset class. If you invested the full ISA subscription (£20,000) today and did nothing for 30 years, you’d have more than £150,000 by 2049, assuming a 7% annual return.

So, as we approach the ISA deadline (5th April), have a think about whether you’re making the most of your allowance.

For me, throwing any surplus cash into a diversified portfolio of dividend-paying stocks with bright futures will always be a far better strategy for making your twilight years as comfortable as possible.  

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.

Paul Summers 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

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Would a stock market crash matter?

Christopher Ruane explains why a stock market crash could turn out to be positive, not negative, for a private investor…

Read more »

Investing Articles

Has the Rolls-Royce share price peaked?

After a strong 2023 performance and (so far) in 2024, the Rolls-Royce share price has stuttered in recent days. Christopher…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Turning a £20k ISA into a £13,900 yearly second income? It’s possible!

By investing a £20k ISA now using certain basic principles, our writer thinks he could set up a second income…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With no savings, I’d follow Warren Buffett’s number one rule to build wealth

Can this one piece of Warren Buffett wisdom really help our writer as he aims to build wealth in the…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

A second income of £1k a month from just £10 a day! How would I do that?

Mark David Hartley considers how to build a second income stream starting from just £10 a day. Is £1,000 a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Turn £8,900 into a £24k annual passive income? Here’s how!

Christopher Ruane applies some investing lessons from billionaire Warren Buffett when explaining how he'd aim to earn sizeable passive income…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »