With the best interest rates on savings accounts being around 1.5% at the present time, it is perhaps surprising that they remain popular. After all, the spending power of cash is gradually declining due to its returns being lower than inflation. This situation may remain in play over the coming years, since the prospect of a rapid rise in interest rates seems unlikely.
FTSE 100 appeal
By contrast, the returns on the FTSE 100 appear to be far more enticing. It is possible to generate an income return that is three times higher than the best savings rates, with the potential for capital growth making the index’s total return far more impressive than that of savings accounts.
Although the current prospects for capital growth may seem to be somewhat limited as a result of the uncertainty which faces the world economy, the FTSE 100 has a track record of recovering from challenging periods. It has delivered high single-digit capital returns on an annual basis over a sustained period, despite a variety of bear markets, recessions and corrections taking place.
As such, although risks may be high at the present time due to the potential for further protectionist policies being put in place by the US and China, in the long run an investment in the FTSE 100 is likely to outperform cash savings. Moreover, the best times to invest in the stock market have historically been during uncertain periods for the index and the world economy. With investor sentiment being relatively weak at the present time, this suggests that there may be buying opportunities on offer.
Of course, opening a Lifetime ISA is likely to provide a further boost to your returns in the long run. Available to anyone under the age of 40, a Lifetime ISA provides a 25% government bonus on amounts invested through the product up to the maximum annual allowance of £4,000. This means that you could obtain £1,000 per year, or up to £33,000 in a lifetime, from simply using a Lifetime ISA to buy shares.
The government bonus is paid until the age of 50, at which time no further contributions can be made. With a Lifetime ISA offering tax efficiency, as well as flexibility in terms of a withdrawal penalty not being applied if it is used to fund the purchase of a first home, it could offer an appealing mix of high returns and simplicity.
Despite this, take-up of Lifetime ISAs has been rather low – especially when compared to Cash ISAs. With the cost of a Lifetime ISA being relatively low, and often it paying for itself through the government bonus, now may be the right time to capitalise on the FTSE 100’s relatively appealing price level by investing in a range of large-cap shares through a Lifetime ISA.
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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.