Interest rates are not expected to rise significantly in 2020. As such, the returns available from Cash ISAs and savings accounts could continue to be very disappointing.
This is terrible news for investors who are using the Cash ISA to try to beat the State Pension. For the past few years, Cash ISA returns have lagged inflation, meaning that any money stashed inside one of these tax-free wrappers is losing purchasing power and not growing in value.
Therefore, any investors who are relying on a Cash ISA to supplement their retirement income could be sorely disappointed.
FTSE 100 stocks could offer a much better alternative, instead of owning a Cash ISA. Not only does the FTSE 100 support a higher dividend yield than the interest rate provided by most Cash ISAs today, but the index also offers capital growth potential in the coming years, that may help to improve your financial future.
An interest rate of 1.36% (the best Cash ISA deal on the market at the moment) might not seem like a bad return at first, but with inflation expected to be around 2% over the long run, the real (inflation-adjusted) returns on your capital could be negative.
An inflation rate of 2% and an interest rate of 1.36% implies a real return of -0.64% per annum. Ouch.
The interest rate situation could become much worse before it becomes better as economic risks such as Brexit continue to cause the outlook for the UK economy to be uncertain.
The FTSE 100 is not immune to economic uncertainty, but it does offer the prospect for much better returns over the long run. Over the past 30 years, the index has produced an average annual return of around 9%. Its global diversification and exposure to different sectors and industries have helped the index ride out economic turbulence.
As such, buying the FTSE 100 may be a better option for investors over the long run.
The numbers tell the story
A saver who puts away £100 a month from 30 years of age and intending to retire at age 65, would have just £44,500 saved at the time of retirement at an interest rate of 1.36%.
That is excluding the impact of inflation on returns. However, if the same saver invested their hard-earned cash in the FTSE 100, they would be able to look forward to a pension pot of £185,000 at the time of retirement.
Considering the index’s performance over the past three decades, this trend looks set to continue in the long run. As a result, it makes sense to switch your capital from a Cash ISA to a low-cost FTSE 100 tracker fund.
As the figures above show, long-term investors should benefit significantly from owning the UK’s leading blue-chip index over a low return Cash ISA, even though the prospect of owning cash might seem more attractive in the short term.
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Rupert Hargreaves owns no share 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.