The Motley Fool

Do this one thing now and leave behind the paltry returns from a Cash ISA

Cash ISAs continue to be highly popular among UK consumers. In fact, the vast majority of ISAs opened each year are Cash ISAs. While it’s encouraging that many individuals are seeking to save their hard-earned cash for a first home, retirement, or even just for a rainy day, they may be missing out on significantly higher returns available elsewhere.

Since it is becoming easier to access the stock market, with online opportunities growing in number and simplicity, investing in shares is now more accessible than ever. As such, investing in a tax-efficient account could mean that a 1.5% interest rate on a Cash ISA comes to be viewed as highly inadequate by the vast swathes of people who currently utilise them.

Automatic investing

The idea of investing in the stock market often conjures up thoughts of difficulties among individuals who use cash ISAs. While these are easy to set up and manage, a Stocks and Shares ISA can be just as simple to use. Account opening is generally done online for many people, while the fees involved are relatively low as a proportion of the amounts invested – even for smaller investors.

Moreover, it’s possible to set up a direct debit which pays money into a Stocks and Shares ISA on a regular basis. The minimum amounts are often less than £50 per transaction, which means it’s possible for someone with modest savings to benefit from the growth potential of the stock market.

And with regular investing available on the majority of major sharedealing platforms, it’s possible to set up monthly purchases of specific funds or shares, without having to spend large amounts of time managing them.

Improved technology

There are also various apps now available which can make investing even simpler. Moneybox, for example, rounds up card transactions to the nearest pound, with the difference automatically invested in a specified tracker fund. This could be a sound means of gaining access to the stock market simply from investing loose change.

Furthermore, with the cost of investing in tracker funds having fallen in recent years, it’s possible to gain access to a diverse range of shares for a minimal ongoing cost. This could lead to improved long-term returns for a wide range of investors, and help to widen the difference in returns between investing in shares versus a Cash ISA.

Higher returns

Although the stock market is a riskier place to invest than a Cash ISA, for many people the additional returns that may be on offer could make it worthwhile. Mid-cap shares could continue to deliver high single-digit annual total returns over the long run, which may have a major impact on the financial prospects for a variety of investors.

As such, while saving money through a Cash ISA shows that an individual is able to budget effectively, in order to improve their long-term financial outlook the stock market may be the logical next step.

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