It’s rather easy to upbeat on the Cash ISA. They have their uses for the short-term holding of funds, or the storage of money for a rainy day. But largely speaking, they’re awful ways to place your excess capital.
One half of the problem is the pathetic interest rates on offer to customers, a reflection of the Bank of England’s historically-low benchmark rates during the past decade. There’s not a single instant-access Cash ISA which offers above 1.5% right now. And with inflation soaring above this level (CPI came in at 2.1% in August), it means the value of your savings is actually eroding.
What’s more, the gap between the savings rates on these products and inflation rates threatens to get even wider as the spectre of more Bank of England rate reductions grows.
Get a better rate
As I say, though, the impact of inflation on your hard-earned savings is only one side of the coin. The other reason why Cash ISAs are such terrible products is that, even when inflationary pressures are much less intense, the possible returns from such accounts remain quite pathetic, compared with those on offer from other investments.
A scan of price comparison site comparethemarket.com shows Charter Savings Bank currently offers the best interest rate on a no-notice Cash ISA. The rate? A paltry 1.44%.
Compare this with some of the mighty dividends yields on offer on the FTSE 100. Housebuilders Taylor Wimpey and Persimmon are some of the biggest payers with forward yields in around 12.5%, although there’s a sea of other generous payers to pick from today.
ITV, HSBC and International Consolidated Airlines, for example, all boast corresponding yields above 7%, while packaging play DS Smith and advertising giant WPP offer yields of 5.5% and 6.5%, respectively.
Make a million
Now placing your money into a cash account offers peace of mind like few other investments. The only risk here comes from the unlikely collapse of the bank or building society in which you’ve parked your money. Besides, under current Financial Conduct Authority rules, you’d be covered for the first £85,000 which you’ve saved anyway.
The same security can’t be found with stock investing, of course, where company bankruptcies can wipe out your holdings and stock price volatility can smash shareholder returns.
However, by creating a balanced portfolio packed with FTSE 100 shares, the prospect of insolvency isn’t something investors need to really worry about, while those holding, say, 10-20 companies across a variety of industries, can lessen the danger that share price volatility can pose to their returns.
The large number of millionaires who’ve made their fortunes with a Stocks and Shares ISA will attest to the brilliant returns that can be made with equity investment. How many people have you heard of who have got rich from cash-related products? Not many, I would suspect.
My advice: kick these low-yielding accounts to the kerb and get rich with the Footsie instead.
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Royston Wild owns shares of DS Smith and Taylor Wimpey. The Motley Fool UK has recommended DS Smith, HSBC Holdings, and ITV. 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.