Making a million in a Cash ISA is an incredibly challenging prospect. While not impossible, it would take a significant amount of time and money to achieve.
One of the reasons for this is the low return on cash. Over the long run, in fact, it is unlikely to offer a positive return once inflation is factored in.
By contrast, investing in the FTSE 100 could make it far more likely that an investor will make a million. Its return potential appears to be relatively high at the present time.
As such, now could be the right time to pivot from a Cash ISA to a Stocks and Shares ISA.
At the time of writing, the best returns that are available on Cash ISAs are around 1.5%. Assuming that an individual invests the maximum ISA allowance of £20,000 in a Cash ISA each year, and that interest rates remain constant, it would take them around 38 years to become a millionaire.
While this may seem to be an achievable goal to someone who has a long-term horizon, the reality is that £1m in 38 years’ time will have significantly less spending power than £1m today. Since inflation is currently ahead of the 1.5% returns that are available on a Cash ISA, investors allocating capital to one are essentially losing money on a real-terms basis.
Of course, interest rates are at historic lows at the present time. They are likely to rise over the coming years, which could mean that the returns available on a Cash ISA improve. But with Brexit causing a degree of uncertainty, there are no guarantees that higher interest rates are ahead. Furthermore, rising interest rates are often prompted by higher inflation. This could offset the impact of a higher interest rate when viewed on a real-terms basis.
While a Cash ISA may not be an appealing means of building wealth over the long run, the FTSE 100 could perform significantly better in that respect. Since inception in 1984, the index has recorded an annualised total return of over 8%. Assuming it continues to deliver that rate of return over the next 38 years (i.e. the amount of time it would take to have a £1m Cash ISA in the earlier example), an investment of £20,000 per year would be worth £4.4m.
Clearly, there is a risk that the FTSE 100 will not deliver 8% annualised total returns in the long run. Indeed, its performance over the last two decades has been lacklustre. But with it having a dividend yield of around 4.5% and being exposed to fast-growing economies around the world, it seems to be a far superior option compared to a Cash ISA for investors who are looking to make a million. As such, now could be the right time to open a Stocks and Shares ISA and buy a range of FTSE 100 stocks.
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Peter Stephens 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.