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Have money to save this payday? I’d ditch the Cash ISA and look for higher returns

If you have money to save this payday, that’s great news. However, before you go and dump it in a Cash ISA, ask yourself whether that’s the best move financially. Given that the best related interest rate is around 1.5%, if you’re saving for a long-term goal, you may be better off ditching the Cash ISA and investing that money elsewhere.

Better options

Two alternative accounts you could consider are the Stocks & Shares ISA and the Lifetime ISA. These investment vehicles are far more powerful than the Cash ISA because they enable you to hold a wide variety of wealth-boosting investments, and not just cash savings. Like the Cash ISA, they’re tax-efficient – all capital gains and income generated within them are completely tax-free.

If you’re looking for flexibility in terms of accessing your money, a Stocks & Shares ISA is probably your best bet, as this account allows you to access your money at any time. You can put up to £20,000 per year into this ISA.

With the Lifetime ISA, your money is locked away until you turn 60, or you buy your first house. However, this ISA – which is only open to those aged 18-39 and has an annual allowance of £4,000 – does come with 25% bonuses from the government, which is a huge attraction. As an example, if you were to put in £1,000, the government will add in another £250 for you.

Get your money working for you

As to where to invest the money once you have opened one of these accounts, there are many options. One solid option, in my view, is dividend-paying companies. These pay out a certain proportion of their profits, in cash, to shareholders on a regular basis.

Popular dividend stocks include the likes of Royal Dutch Shell, Lloyds Bank, and Legal & General. Right now, all three of these stocks offer dividend yields above 6.5%, although bear in mind that dividends are not guaranteed.

If you don’t want to pick stocks yourself, you could consider investing in a FTSE 100 tracker fund. This will give you exposure to the 100 largest companies listed in the UK through just one security. These funds generally offer dividend yields of around 4.5% right now.

Alternatively, if you’re looking for a little more growth, you could consider investing in a global equity fund that invests in top companies listed all across the world. While past performance is no guarantee of future performance, many of these funds have performed very well in recent years due to the strong growth of the world’s largest tech companies. For example, the Fundsmith Equity fund, which I’m a huge fan of, has delivered a return of 173% in just five years.

Ultimately, the choice is yours. Just make sure you get your money working for you. If it’s earning 1.5% or less in a Cash ISA, you’re not going to get ahead.

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Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group, and Legal & General Group and has a position in the Fundsmith Equity fund. The Motley Fool UK has recommended Lloyds Banking Group. 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.