Even though Stocks and Shares ISAs have become increasingly popular in recent years, they still lag Cash ISAs in terms of the number of accounts that are opened each year.
This is somewhat surprising, since interest rates are close to historic lows. This means that the long-term return prospects for cash could be limited – especially since interest rates are forecast to remain at low levels over the next few years.
As such, investing in the stock market through a Stocks and Shares ISA could be a sound move. It offers tax efficiency, low costs and simplicity that makes it accessible to all investors.
At the present time, the best interest rates on cash savings are around 1.5%. Saving £100 per month over a period of 30 years would lead to an account value of £45,000 by the end of the period, assuming an interest rate of 1.5%. While this may sound like a relatively large amount of capital from which to draw an income in older age, the reality is that its spending power would decline due to the impact of inflation. In fact, since inflation is higher than interest rates, savers are obtaining negative real-terms returns on their capital.
This situation could remain in play over the long run. Interest rate rises are normally prompted by a higher rate of inflation, while the Bank of England may wish to remain cautious regarding interest rate rises in order to reduce the risk of recession. This may mean that cash remains unappealing over the long run.
High return potential
By contrast, investing in the stock market through a Stocks and Shares ISA could prove to be a much better idea. For starters, a Stocks and Shares ISA is cheap to administer, with its yearly costs generally being less than the commission on one trade. Furthermore, Stocks and Shares ISAs offer tax efficiency, as well as a simplicity that is not present with SIPPs and pensions. In other words, no tax is due on withdrawals, which could increase flexibility and make it simpler to budget an income in older age.
Since indices such as the FTSE 100 and FTSE 250 are currently trading on what appear to be wide margins of safety, now could be the right time to buy a range of companies within a Stocks and Shares ISA. And, for smaller investors and those people who are starting out, a tracker fund could provide diversity at a low cost.
In the long run, the stock market is likely to significantly outperform cash savings. This means that at a time when there are risks causing valuations to be relatively low, it could be an opportune moment to open a Stocks and Shares ISA in order to capitalise on the FTSE 350’s long-term growth prospects.
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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.