Today, the best flexible Cash ISA on the market offers an interest rate of just 1.36%. You can get a bit more interest if you’re willing to lock your money away, but not much.
A one-year fixed-rate Cash ISA from challenger bank Aldermore offers an interest rate of just 1.5%, and you can get up to 2% if you lock it up for five-years.
However, rather than helping you save for the future, these products could cost you money.
Cost you money
According to my calculations, over the past five years, a £1,000 savings pot would need to have grown by an average of 2.6% per year just to have kept pace with inflation. If a lower rate of growth was achieved, the real value of the money would have fallen.
On that basis, a fixed Cash ISA with an interest rate of just 2% per year would have cost a saver 0.6% per annum, after including the impact of inflation since 2014. That’s a pretty terrible rate of return.
With that being the case, I believe if you want to grow the value of your money over the long term, you need to look to the stock market. And one investment that looks more attractive than most, in my opinion right now, is the FTSE UK Equity Income Index Fund from Vanguard.
Equity income
Vanguard’s offering seeks to replicate the performance of the UK Equity Income Index, an index of the top blue-chip income stocks in the UK. There are currently 126 stocks in the portfolio, producing an average annual dividend yield of 5.7%, which is 1.2% higher than the current FTSE 100 dividend yield of 4.5%.
As well as the market-beating dividend yield offered by this fund, it’s also one of the most competitively priced on the market. The current ongoing charge levied by the fund manager on investors’ assets is just 0.14%. Studies show that the average annual management fee charged by active funds in the UK is closer to 1%.
Not only does the UK Equity Income Index Fund offer investors a diversified portfolio blue-chip income stocks, but it also provides the potential for capital growth as well.
Through a combination of income and capital growth since inception, the fund has produced an average annual return for investors of 9.8%, excluding fees. When you compare that to the 2% rate of interest on offer from the best fixed-rate Cash ISA on the market at the moment, it’s difficult to ignore the potential of this buy-and-forget income fund.
Flexibility
Another advantage of using Vanguard’s fund is that it’s flexible. You can invest every month, and withdraw the money whenever you want, unlike those fixed-term Cash ISAs. This flexibility allows you to make the most of the power of compound interest.
According to my calculations, an investment of just £100 a month in Vanguard’s offering over five years would grow to be worth £7,700. Meanwhile, a simple investment of £1,200 in a 2% fixed Cash ISA with no further contributions would be worth just £1,325 after five years.
That’s why I would rather buy the FTSE UK Equity Income Index Fund than a Cash ISA any day.
