Calling all cash ISA investors: 2 critical nuggets of information that you need to know

Royston Wild shares some important details that all cash ISA investors need to know about.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’re one of those people with capital locked up in an easy-access cash ISA, there’s a couple of pieces of information you need to know today.

Nugget #1: Rates are rising

First of all, so meagre are the returns on such accounts that any upswing in interest rates need to be exploited to their fullest. And rates have indeed perked up a bit in recent days.

Paragon Bank, which was already offering one of the headiest interest rates on the market, late last week launched a new ‘Limited Edition Easy Access’ product offering 1.37% AER on savings between £1 and £100,000.

Not one to sit still, Leeds Building Society has also been raising rates by a decent margin and it is now offering 1.36% AER through its ‘Limited Issue Online Access’ cash ISA. The account can be opened with as little as £1,000 but balances must be kept above this level, otherwise the rate falls to just 0.05% AER.

Frequent savers may want to take a look at Vernon Building Society’s Regular Saver ISA and its 1.95% AER interest rate, too. A few caveats apply, however. For balances totalling £25,000 or more, the interest rate falls back to 1.45%, a maximum of £500 can be deposited per month, and the account doesn’t allow transfers from existing ISA accounts.

These rates still aren’t enough to get the pulse racing. Even if you’re prepared to lock your money up for a fixed period of time, potential returns aren’t exactly likely to prove stratospheric, either. A scan of price comparison website Moneysupermarket.com shows that the best five-year, fixed-rate cash ISA currently on the market is offered by Coventry Building Society with an interest rate of 2.3%.

Nugget #2: Better returns can STILL be found elsewhere

Interest rates on these cash products are clearly on the charge again, and investors need to keep their ear to the ground for further hikes as the competition among providers increases.

Still, one thing remains the same and always will. Relying predominantly on cash ISAs as a way to build your retirement nestegg can have a catastrophic effect on your savings. And this is particularly so now that inflation in Britain is beginning to run rampant again — August’s CPI reading of 2.7% certainly makes mincemeat of even the best-paying cash ISAs currently on offer today.

Cash-based products certainly have their place, but that these should predominantly only be used for holding emergency capital or funds that are only to be held for an extremely short period of time. Aside from the risks of capital erosion that rebounding inflation now creates, investors are missing out on some brilliant investment opportunities elsewhere by keeping their holdings in cash.

A Stocks & Shares ISA is a much more intelligent way of saving, we here at the Fool believe, as there are plenty of attractive companies to pick from even for the most risk-tolerant investor.

Take support services provider Bunzl. Its share price has risen 75% over the past five years and its exceptional defensive qualities allowing profits to keep on moving higher throughout the period. Dividends have risen 25 years on the spin, too, because of its solid earnings performance. And at current prices, the FTSE 100 firm carries a forward dividend yield of 2.2%, smashing the rates of those aforementioned easy-access cash ISAs.

Clearly cash ISAs have their place. But don’t be too reliant upon them… they can do serious damage to your wealth.

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.

Royston Wild 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »