Using a Cash ISA to build your wealth is a fairly common step to take. It is a simple product that offers cash advantages versus a bog-standard savings account.
However, in reality, those tax advantages are unlikely to be felt by the vast majority of people. And with interest rates potentially moving lower in the short term, the return prospects from Cash ISAs may be highly unappealing.
As such, now could be the right time to invest in the stock market instead of using a Cash ISA. The valuations on offer across the FTSE 100 and FTSE 250 appear to be low, which may further improve their appeal compared to a Cash ISA.
Tax advantages?
As mentioned, the tax benefits of using a Cash ISA are unlikely to be felt by most people. Basic rate taxpayers can earn up to £1,000 per annum in interest income without paying tax. Therefore, a Cash ISA will only offer tax benefits if your interest income is above that level each year.
Since interest rates are low, and are expected to stay low in the near term, you would require a large amount of cash held in a bog-standard savings account to pay tax on the interest income. For example, assuming you obtain a 1.25% interest rate on your cash, you would need to have £80,000 in a savings account to generate £1,000 in interest per year.
Therefore, unless you have that amount of cash, using a savings account rather than a Cash ISA may equate to the same net return each year.
Interest rate forecasts
With the UK economy continuing to face Brexit risks, the Bank of England may decide to maintain low interest rates in the near term. In doing so, it may help to stimulate the economy during a period of political change.
Additionally, a low rate of inflation may encourage a loose monetary policy to be maintained. The risk of the economy overheating through having a low interest rate seems to have diminished in recent months, which may be bad news for savers.
As such, it could be worth considering other assets to generate a worthwhile return on your hard-earned capital.
Stock market appeal
At the same time as holding cash seems to be unappealing, the stock market offers numerous companies that trade on low valuations. Many FTSE 100 and FTSE 250 shares, for example, offer three times the income return provided by savings accounts. And with many of those stocks forecast to post rising profitability in the coming years, their total returns could be highly attractive.
Therefore, with the tax advantages of a Cash ISA unlikely to be realised by most savers and interest rates being low, now could be the right time to focus your capital on the stock market while it trades at an appealing price level.
