I don’t believe in investing my hard-earned cash in low-paying savings products like Cash ISAs.
Okay, I have a Cash ISA which I use for holding money temporarily before making a big purchase and for retaining emergency cash. But using this sort of product as a means of saving for retirement is a recipe for disaster, in my book. This is why the majority of the money I earn is used to buy UK shares in a Stocks and Shares ISA instead.
The pros and cons of Cash ISAs
Let’s look at the best-paying, instant-access Cash ISA currently on the market. According to moneysupermarket.com, that’s the Marcus account from Goldman Sachs — offers an interest rate of just 0.5%.
The advantage of investing in a cash product over something like a Stocks and Shares ISA is of course that the £1 I choose to park in it will still be worth £1 in five, 10, even 50 years. Conversely, who knows what the £1 worth of shares I buy in my Stocks and Shares ISA will be worth decades from now. Stock markets go down as well as up and the value of my holdings could be worth considerably less that I’d be hoping for.
Poor returns
But here’s the problem with using a Cash ISA to try and retire in comfort. Those earning even a decent salary are unlikely to make enough to live out their post-retirement dreams with such low-yielding products.
Let’s say that someone aged 30 manages to squirrel away £300 a month for their retirement. Using that 0.5% from Marcus as an example, over the next 35 years, that person will have made £137,669.
That’s better than a hole in your pocket, clearly. But dig down a little deeper and that figure suddenly doesn’t look so enticing. Firstly, for those looking to buy an annuity (a monthly pension payment until death) that sort of figure would barely cover the basic cost of living.
According to Which?, a single person would need a retirement pot worth £123,365 to have an annual income of £13,000 through a combination of the State Pension and annuity payments.
How to retire with cash to spare
And secondly, the amount I can expect to make with a Stocks and Shares ISA smashes what I’d likely end up with by saving in a Cash ISA. Let’s say that person invested £300 per month on UK shares instead. Over the same 35 years, they could expect to have built a retirement pot worth a much-improved £692,694.
That’s based on past form that shows the average long-term UK share investor makes an average annual return of 8%. This sort of pot would provide an annual income of £31,000 if an investor were to buy an annuity at the point of retirement, according to Which? And it would allow them to live a “luxurious retirement,” it says.
