State Pension: I’d dump a Cash ISA and Premium Bonds to buy FTSE 100 dividend shares

The FTSE 100 (INDEXFTSE:UKX) could offer superior returns than a Cash ISA or Premium Bonds.

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.

Deciding where to invest for retirement can be a tough choice. On the one hand, products such as a Cash ISA and Premium Bonds have appeal since they offer a potential return without risk. But on the other hand, they may ultimately lead to reduced spending power since their returns are less than inflation.

As such, FTSE 100 dividend shares could offer a more appealing risk/reward ratio. Certainly, there’s scope for capital loss, but for individuals who have a long-term time horizon, they may provide a better opportunity to overcome the disappointing State Pension.

Return potential

With the State Pension amounting to just £8,767 per year and the age at which it starts being paid set to increase to 68 over the coming decades, having a passive income in retirement is becoming a necessity for many people.

The FTSE 100’s dividend yield of 4.6% means it may not take an impossibly large amount of capital to generate a sizeable passive income. For example, a £190,000 nest egg would more than double the State Pension if it’s invested in FTSE 100 shares and their dividends are used as an income.

By contrast, a Cash ISA’s 1.5% interest rate and the Premium Bond’s annual prize rate of 1.4% would require a significantly larger nest egg to double the State Pension. In fact, it would require a nest egg of £585,000 for a Cash ISA, while the £50,000 limit on investments in Premium Bonds would generate a return of only £700 per year, on average.

As such, investing in the FTSE 100 could produce a higher income than a Cash ISA or Premium Bonds in retirement. It may also be a better means of building a nest egg as a result of its higher income prospects, as well as its growth potential.

Risk of loss

As mentioned, Cash ISAs and Premium Bonds may be appealing to investors who don’t wish to risk losing money. However, when inflation is factored in, both products may lose money for investors. In other words, the value of £1,000 invested in a Cash ISA or Premium Bonds is expected to decline in terms of the goods and services it can buy in 10 years versus today.

By contrast, £1,000 invested in the FTSE 100 today could be worth significantly more in 10 years even after inflation is factored in. Certainly, there’s scope for capital loss during that time. But by diversifying across a number of companies and holding through more challenging periods, it may be possible to build a larger nest egg.

For retirees, even if a company’s shares fall in value, the receipt of dividends may mean a portfolio of FTSE 100 stocks still offers the opportunity to become less reliant on the State Pension in older age. As such, now could be a good opportunity to buy a range of large-cap income shares.

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.

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

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »