I think it could be time to dump your Cash ISA as economic uncertainty grows around the world. This can be a great way to save money for the future in a tax-efficient product. However, while Cash ISAs are tax-efficient, they’re certainly not inflation-resistant.
The scourge of inflation
At the time of writing, the highest interest rate available on a Cash ISA is just 1.5%. You can get a bit more if you’re willing to lock your money away for a few years. But this would still only leave you with 2-2.5% in annual interest.
Unfortunately, this doesn’t beat the current rate of inflation. That means your money will lose purchasing power as inflation eats away at it. Technically, interest rates should offset inflation costs, but they haven’t for the past decade.
And it only looks as if the situation is going to get worse for savers. The falling value of the pound means it’s going to cost more to import goods and services. The UK is heavily reliant on imports, and these costs are usually passed on to consumers. This means inflation is likely to increase in the weeks and months ahead. If there’s a no-deal Brexit, inflation could spike as trade tariffs, extra transport costs, and the weak sterling all combine to produce a perfect storm.
A better buy
Against this backdrop, Cash ISAs seem to me to be a waste of time. Instead, I’m investing my money in globally-diversified income stocks. There are three key reasons why I’m taking this approach.
First of all, globally-diversified companies should benefit from the falling value of sterling, as they will be able to bring money back into the country at better rates of exchange.
Secondly, their income is not dependent on the UK economy. So no matter what happens after Brexit, profits should continue to flow.
Thirdly, the companies I’m selecting for my portfolio all support dividend yields of 5% or more. This level of income is far above the level of interest offered by every single Cash ISA on the market today.
By investing in these blue-chip income stocks, I believe I can beat the scourge of inflation and achieve healthy returns for my portfolio at the same time. Not only do these companies offer an attractive level of income, but they also provide the potential for capital growth as earnings grow.
As a long-term investment, these stocks should produce much better returns than cash. According to various studies, over the past 100 years, UK equities have produced an average annual return of around 5%, four times higher than cash over the same time frame.
So overall, if you want to protect and grow the value of your money, then it could be time to dump your Cash ISA and seek safety in blue-chip income stocks instead.
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Rupert Hargreaves owns no share metioned. 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.