Interest rates are not expected to rise significantly in 2020. Brexit concerns and an uncertain outlook for the world economy could cause the Bank of England to retain a cautious stance when it comes to monetary policy.
As such, the returns on money held in a Cash ISA could continue to be highly disappointing. They may even lag inflation in 2020. This contrasts with the income prospects of FTSE 100 shares, which offer an average yield of 4%.
This could mean that now is the right time to buy FTSE 100 shares instead of having a Cash ISA. They may also offer capital growth in the coming years that helps to improve your financial future.
Low interest rates
While obtaining a 1.5% interest rate on your cash may not sound like a bad idea, in the long run it could lead to a loss of spending power. Inflation is expected to be around 2% in 2020, which means that the real-terms return on your capital is set to be around -0.5%, or even worse.
This situation is unlikely to change while risks such as Brexit continue to cause the outlook for the UK economy to be uncertain. They may lead to policymakers deciding that being supportive of the wider economy through adopting lower interest rates that encourage consumers to spend is important. This may prove to be bad news for savers and holders of Cash ISAs.
As mentioned, the FTSE 100 yields around 4% at the present time. However, around a quarter of its members have yields that are in excess of 5%. This suggests that it is possible to build a diverse portfolio of shares that together offer an income return that is significantly higher than 4%. This is double the rate of inflation, and would therefore enhance your spending power.
Additionally, the FTSE 100 offers dividend growth potential. Many of its members are forecast to increase their profitability in 2020 and the coming years. This may enable them to pay a rising level of dividends that beats inflation. The end result could be an income that is much higher than that offered by a Cash ISA over the long run.
Although obtaining capital returns may not be your priority at the present time, the FTSE 100’s track record shows that it has a solid history of growth. For example, it has recorded capital growth of almost 6% since inception. This trend may continue in the long run – especially since many of its members seem to trade on low valuations at the present time.
Therefore, switching your capital from a Cash ISA to FTSE 100 shares could be a good move. It may improve your income prospects and offer capital returns in the long run.
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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.