Forget the market crash and recession. It’s the Cash ISA that will kill your retirement dreams!

Those looking to grow their wealth will do far more harm saving in a Cash ISA than investing in shares, thinks Paul Summers.

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The UK economy may be reeling from the coronavirus pandemic, but I think there are far more important things for retirement-focused savers to be worrying about. A more pressing concern is the amount of interest they’re receiving on any money they’ve deposited in a Cash ISA. Here’s why.

Cash ISA rates are staying low

The fact that things are so bad out there means that we’re unlikely to see a significant rise in interest rates for a long time. Indeed, there’s a possibility that rates could even turn negative if Covid-19 continues to wreak havoc across the globe.

Negative interest rates would be good news for UK borrowers, particularly those with variable-rate mortgages linked to the base rate. As odd as it sounds, such a scenario would effectively require mortgage providers to pay interest to those they lend to.

Having said this, negative interest rates are bad news for savers because it means that they are likely to be charged by banks for holding their cash. In ‘normal’ times, the complete opposite is the case.

And it’s not as if savers were doing well beforehand. This latest setback follows years of cripplingly low rates where Cash ISAs have struggled to keep up with, let alone beat, inflation. As things stand, the best instant access account pays just 1%! This really matters because it means the value of any cash you have is barely holding (and probably losing) its value as time goes by due to the impact of inflation. 

A better strategy

As long as any high-interest debt (like credit cards) has already been eliminated, having some savings in cash is never a bad idea. It can, after all, act as a buffer for dealing with life’s little emergencies.

Personal finance gurus argue over how much we should save. For me, however, the answer is simple: hold enough to allow you to sleep at night if you lost your job that morning. And don’t bother holding it in a Cash ISA. Thanks to the £1,000 Personal Savings Allowance, a bog-standard account will do. 

When it comes to managing any remaining money you have, however, the answer for me is equally straightforward. If you haven’t done so already, open a Stocks and Shares ISA and start buying stakes in quality companies that you can hold for decades. If single company stocks feel too risky, buy funds instead.

But what if markets crash?

The possibility of another market crash as we hobble into 2021 is real. Rising infection rates around the world make lockdowns more likely. When this last happened, in March, share prices tumbled. 

So yes, there’s always a chance that buying stocks now could lead to paper losses in the near term. Then again, there could be some great vaccine-related news around the corner and we might see a stonking recovery. The point is, we just don’t know.

Over a long enough timeline, however, we do know that the probability of making money from shares is high, especially if you reinvest any dividends. The return you get is also likely to beat other asset classes over the long term. That’s a vitally important fact for all retirement-focused savers to grasp. 

Don’t fear another market crash, embrace it. And steer clear of Cash ISAs.

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.

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