At the present time, the best return available on a Cash ISA is around 1.5%. While this is an improvement on the level available over recent years, it continues to represent a low rate of return compared to other assets, such as shares.
As such, it seems to lack appeal for both pre-retirees looking to build their wealth over the long run, as well as retirees who are seeking to generate a second income in retirement. Therefore, ditching a Cash ISA and looking elsewhere could be a worthwhile move.
Low returns
It is difficult to envisage a scenario where it is worth having a Cash ISA. Its return is lower than inflation, which means that if capital is invested in a Cash ISA then its spending power will decline over time. For someone who has a number of years to retirement, this could mean that their nest egg is unable to provide the desired second income in retirement.
Likewise, a Cash ISA lacks appeal for retirees. For example, in order for an individual to merely double their state pension of £164.35 through a cash savings product, they would need a nest egg of £570,000. While that is an achievable figure for some people to have built up during their working lives, it is still a large amount of capital in order to have what is a relatively poor income in retirement.
Furthermore, with the first £1,000 of interest income earned outside of a Cash ISA now not being subject to tax, the product lacks tax advantages. Therefore, it seems to be largely redundant, and yet it remains very popular with many savers.
Income shares
While investing in risky growth stocks may not be appealing to a large number of people who are concerned about losses, dividend stocks could be a worthwhile opportunity. Certainly, there is a still a risk that they will fall in value. But over the long run, they may offer more consistent returns than the wider stock market, as well as significantly better returns than a Cash ISA.
For example, it is possible to buy a portfolio of FTSE 100 shares that averages a dividend yield of over 5% at the present time. Even buying a FTSE 100 tracker fund provides an income return in excess of 4%. And with the index being internationally-focused, it offers a large amount of geographic diversity that could help to reduce investor concerns about the risks which may be ahead for the UK economy.
Even if the FTSE 100 does not deliver any capital growth while an investor is exposed to it, an income return of three times that offered by a Cash ISA could mean that it is more desirable for pre-retirees and for retirees. As such, now could be the right time to start investing as the new tax year kicks off, with a Cash ISA’s returns being insufficient to make it a worthwhile move when it comes to retirement planning.
