While having some cash available for emergencies is always a good idea, relying on Cash ISAs to fund your retirement plans could be a dangerous move. After all, the best interest rate currently available is around 1.5%, with this figure unlikely to rise rapidly as a result of the prospect of limited interest rate increases over the next few years.
By contrast, focusing your retirement savings on FTSE 100 dividend stocks could prove to be a better idea. Not only do they offer significantly higher income returns than a Cash ISA, there’s also the scope for capital growth. In fact, with uncertainty regarding the world economy’s outlook high at present, now could be a worthwhile time to buy high-quality stocks trading on low valuations.
Interest rate prospects
Although the current low interest rates are unlikely to last in perpetuity, they’re due to remain in place over the coming years. In fact, there’s the potential for interest rates to fall in the UK due, in part, to the uncertainty that lies ahead from a political and economic perspective.
As such, savers hoping for higher returns from their Cash ISAs may be disappointed. Their spending power may continue to fall as a result of inflation being ahead of interest rates. This could damage their chances of building a nest egg that can provide a passive income in older age, and may lead to a longer working life than otherwise would be the case.
Furthermore, a lack of interest rate rises could be good news for investors in the FTSE 100. A low interest rate may make shares more appealing compared to other assets, and could lead to rising demand among investors that helps to push the valuations of many companies higher.
At present, there are a wide range of FTSE 100 shares offering a higher income return than the index’s 4.2%. This not only suggests they offer impressive income outlooks, but also provide good value for money. In many cases, investors are pricing in a difficult period for the world economy as the trade dispute between the US and China continues. This may mean there are a range of stocks which offer wide margins of safety. Through buying such stocks, you may be able to obtain a significant amount of capital growth in the long run.
While there’s a risk of falls in the value of large-cap shares not present in a Cash ISA, for long-term investors the stock market is likely to hold significant appeal. History shows the FTSE 100 has always recovered from its downturns. So by diversifying and having a long holding period, you’re likely to benefit from the total return potential of the index in order to build a large retirement nest egg.
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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.