£20,000 in savings? I’d invest in the stock market to aim for a 9% annual return

Cash ISAs are reaching record levels ahead of the general election. But Stephen Wright thinks the stock market could be a better alternative.

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UK savers have been piling money into cash ISAs ahead of the general election. I can understand why, but I think they’d do better to consider investing in the stock market.

A Labour government might well look to raise funds by reducing tax-free allowances. But in that situation, I’d rather own stocks and shares than have my money in cash. I’ll elaborate below.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

ISA inflows

According to the Daily Telegraph, the amount held in cash ISAs reached record levels in May. There are two main reasons for this. 

One is the fact that interest rates are at unusually high levels. This gives savers an incentive to keep their money in cash and earn a real return with inflation falling to 2%.

The other is the probability of a Labour majority at the election. The bookmakers currently have this priced at 1:33, indicating that they think this is the most likely outcome.

It’s been speculated that a Labour government might lower the overall ISA contribution limit. As a result, savers are trying to use their tax protection before any changes take place.

Stocks and Shares ISAs

Taking advantage of the current ISA setup might be a shrewd move. But those looking to stash money for the long term should consider stocks and shares as an alternative to cash.

Over the last decade, the average annual return from a Stocks and Shares ISA has been 9%. That’s a significantly higher return than what is currently being offered from cash savings.

There’s no guarantee this will continue over the next 10 years. But with the best cash ISAs offering around 5%,  I think the chances of doing better in the stock market are pretty good.

At the moment, there are some interesting opportunities for UK investors looking to buy shares. And one that looks particularly promising to me is The PRS REIT (LSE:PRSR). 

Real-estate investing

The PRS REIT is a real estate investment trust (REIT). It makes money by leasing a portfolio of houses and distributes the rent it collects to shareholders in the form of dividends. 

Right now, the share price is 77p and the company pays out 4p per share in dividends each year. That implies a 5.2% dividend yield, which is already in line with the best cash ISAs.

In addition, falling interest rates should boost the value of the firm’s property portfolio. I expect this to push the share price higher, generating an additional return for investors. 

Regulations around rental properties could change and this is a potential issue for the PRS REIT in future. But I think the potential rewards on offer make this a risk worth taking.

A 9% return

If the tax allowances in the UK are about to change, it could be wise to take advantage of them while they’re still available. And I’d look to do this through the stock market. 

Shares in the PRS REIT offer a 5% dividend yield. And I think there’s potential for further returns from rent increases, growing its portfolio, and the value of its properties going up. 

If these can contribute another 4% per year, then there could be a 9% return on offer from the stock. In any event, I’d consider it as a worthwhile alternative to cash for the long term.

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.

Stephen Wright 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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