The Motley Fool

A Cash ISA will make you poorer! This is a better way to get rich and retire early

Britons really aren’t doing enough to protect themselves in retirement. It’s a stone-cold fact.

The Stocks and Shares ISA’s been around for 20 years and yet subscription rates remain shockingly low. Right now there are fewer than 3m people subscribed to one of these products out of a total UK adult population of 54m.

The intensifying problem of pensioner poverty isn’t necessarily down to people not putting enough away for their later years, either. Sure, many people out there might be feeling the pinch as the cost of living increases, but overall savings levels are actually on the rise.

To illustrate the point, most recent HMRC data shows that the total amount Britons had saved in ISA-type products, for example, swelled to £69.3bn in the 2017/18 tax year. This was up 13% from £61.6bn in the prior year.

Bad decisions

Of course, not every one of Britain’s pensioners can claim to have been saving diligently for their retirement. The high cost of living allied with poor wages can often put paid to such intentions. But there’s no doubt that the problem of rising pensioner poverty has been worsened by people making bad decisions on what to do with their savings. And unfortunately, this particular issue remains pretty chronic.

That HMRC data, for example, shows that 7.8m people in the UK hold a low-yielding Cash ISA, dwarfing the 2.8m individuals who subscribe to a corresponding stocks and shares-related product. Talk about putting yourself on the road to ruin!

Britons are gradually wising up, though, and the number of people saving cash in an ISA has fallen over the past few years whilst the number investing in a Stocks and Shares ISA has risen. The ratio isn’t improving at the rate that I, and my colleagues here at The Motley Fool, would like to see though.

Cash vs stocks

And let me give you an example of why we think a Stocks and Share ISA is best. Let’s say that you manage to squirrel away £300 for your retirement each and every month, and decide to put this into a Cash ISA paying around 1.4%. After 25 years, you’d end up with £108,120 in your pocket, giving you a paltry profit of around £18,000 on a total investment of £90,000.

And the problems here are twofold. First, the actual value of your savings is likely to have fallen over that time when you factor in the impact of inflation, meaning that you’ll literally have less bang for your buck when you finally draw upon your hard-earned money. And second, returns are likely to prove really quite pathetic compared with what you could expect to generate from a Stocks and Shares ISA.

The long-term average annual return from the UK stock market currently stands at around 8%, and let’s say that this remains the same over the next 25 years. That same £90,000 invested in that time would leave you with a pot of £272,700, giving you a profit of £182,700, around TEN TIMES the profit you’d make through that Cash ISA.

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Royston Wild 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.