Why I ditched the Cash ISA for UK shares

This Fool explains why he’s comfortable with the uncertainty of owning UK shares for the chance of earning a high return.

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.

As an investor, I’m always looking for the best places to invest my money. That’s why I ditched the Cash ISA for UK shares. This was a personal decision based on my own risk tolerance. So it’s not going to be suitable for all investors.

While the Cash ISA does offer some significant tax benefits, especially for higher and additional rate taxpayers, I believe UK shares are better suited to my personal long-term investment strategy.

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Cash ISA returns

The best interest rate available for an easy access Cash ISA on the market at the moment is 0.55%, that’s from Cynergy Bank.

Other interest rates are available, and there are higher rates on fixed and withdrawal-limited accounts. These products limit investor withdrawals, which means they might not be suitable for everyone. I prefer to have complete control over my money, as I never know when I need access. That’s why I tend to stick with easy-access products. 

However, the best easy-access traditional bank savings accounts on the market right now also offer a similar interest rate. Aldermore offers investors 0.5% interest on their money. 

Cash ISAs and easy-access savings accounts do have some key differences. Cash ISA contributions cannot exceed £20k a year. What’s more, tax isn’t due on any interest earned. Interest earned in a regular savings account is subject to tax. The rate of tax will vary significantly between investors. These qualities suggest ISAs may be useful instruments for investors who have high tax liabilities. 

Still, another drawback is the fact the ISA allowance is limited to £20k every year. I can also only put money into one of each kind of ISA each tax year. This encompasses all ISA products, including Stocks and Shares ISAs as well as Cash ISAs.

I’d rather use my entire annual ISA allowance for UK shares. That’s why I’ve decided to keep my cash savings in a traditional bank savings account at the same interest rate and fewer limitations. 

This is based on my own level of risk tolerance. Cash is always going to be part of an asset allocation strategy. I have cash as well as my Stocks and Shares ISA. So, I won’t abandon the asset entirely. 

UK shares 

I have enough cash on hand to cover my living expenses for at least six months. I believe this is the minimum anyone should have to meet unforeseen expenses. With this backstop in place, I’d rather try and earn a higher return on my additional savings with UK shares.

While past performance is no guarantee of future returns, over the past 100 years UK equities have produced an average annual total return of 7%. It seems unlikely this will continue indefinitely. But compared to the current interest rate on Cash ISA products, I think UK shares compare favourably. This also means I have to accept the risk that stocks may decline in value. I’m prepared to deal with that because I already have a cash cushion in place.

This may not be a suitable strategy for other investors due to the volatility and uncertainty of investing. In this respect, the Cash ISA could provide a much more stable and predictable return rate. 

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Rupert Hargreaves 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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