After 14 interest rate hikes in a row, the Bank of England (BoE) voted against a further rise last week. This could be a huge turning point. If interest rates have peaked, it might be time to shift my Cash ISA to a Stocks and Shares ISA for bigger returns.
The 5-6% interest in savings accounts has been nice, but it might be not long for this world. Remember, for most of the last 15 years, rates have been below 1%. The BoE’s own target is 2%. The surge in rates, shown in the graph below, only happened as a response to inflation.
Source: bankofengland.co.uk
If last week’s decision to hold rates at 5.25% is a sign they’ll be heading down soon, I’d expect my Cash ISA to deliver mediocre returns in the near future. It would equally make a Stocks and Shares ISA look like an even more attractive place to put my money.
Here’s an interesting fact. Over 4,000 people have become millionaires in ISA accounts. That is to say, even with the strict deposit limits, there are thousands of UK citizens who have £1m or more in these savings accounts.
Of these wealthy accounts, it’s estimated that almost all of them are Stocks and Shares ISAs. In other words, big wealth creation in ISAs happens mostly, if not entirely, thanks to the stock market. A savings account just can’t compete.
The £1m mark
Here’s a quick calculation to show what I mean. Let’s say I could rely on 5% from a savings account indefinitely. Even at that payout – high for a Cash ISA – it would take £500 a month in the region of 45 years to make it to the million mark.
Created at thecalculatorsite.com
Most of us don’t have half a century to let our money grow like this. Not to mention I’d only get there in the 2060s. By then, inflation will make a million pounds a less impressive sum.
A Stocks and Shares ISA though, with an 11% return reaches the £1m target in 28 years instead. Not exactly brisk, but more realistic for big savers to achieve within a lifetime. Also, inflation won’t be as big of an issue here because I get to the amount quicker.
I will say that investing in stocks is risky. No return is guaranteed and, in any case, 11% might be difficult to achieve. A Cash IS guarantees my original sum and also the return I get back from it. There are advantages and disadvantages to whichever account I choose.
What I’m doing
All in all, I do think the hold in interest rates is a cause for concern. I’m not going to do anything yet, but I’ll be watching the interest on my accounts like a hawk. As I see them come down, I expect I will move much of my Cash ISA into a Stocks and Shares ISA.
