Banks have really let Cash ISA investors down in recent years. Interest rates on these products have plunged in the past decade, and now the best rate on the market for a flexible Cash ISA stands at just 1.31%.
If you are happy to lock your money away for a bit longer, you can achieve a better interest rate. However, you don’t get that much extra for agreeing to lock up your funds.
For example, the top one-year fixed ISA offers an interest rate of just 1.41%. If you lock your money up for two years, the best rate you can get is 1.5%. And for three years, it is 1.67%.
Considering these figures, if you are serious about saving for the future, it might be better to avoid Cash ISAs altogether and go with a Stocks and Shares ISA instead.
Stocks and Shares ISA
The one primary advantage that Stocks and Shares ISAs have over cash ISAs is the ability to be able to invest anywhere.
Indeed, with Stocks and Shares ISAs, you can invest in thousands of stocks, bonds and funds around the world. Most of these stocks offer dividend yields far above what you would get with a Cash ISA.
In addition to the higher level of income, the capital value of these assets can also increase over time. That’s something you don’t get with cash.
Buying the FTSE 100
One of the best ways to invest in the stock market is to buy a low-cost passive tracker fund.
A low-cost FTSE 100 passive tracker fund would give you exposure to the 100 largest listed companies in the UK. When you’ve acquired one of these funds, you don’t need to do anything else. All you need to do is sit back, relax and let the fund managers do the hard work for you.
A tracker fund only replicates the performance of its underlying index. Therefore, there’s no stock selection risk, which means there’s a low risk the manager will make a severe stock-picking mistake that costs you money.
Since its inception more than three-and-a-half decades ago, the FTSE 100 has produced an average yearly return of 9%.
It isn’t straightforward to predict whether or not this trend will continue going forward, but what we do know is that the index currently supports a dividend yield of 4.3%. This is significantly above the level of income most Cash ISAs offer today.
As a result, investors buying a low-cost FTSE 100 tracker fund right now are entitled to a much higher level of income than most cash savings accounts.
On top of this, there’s the potential for capital gains. As the figures above show, capital growth has added 4.7% to performance every year for the past three decades — an excellent bonus for investors.
As such, opening a Stocks and Shares ISA and buying an FTSE 100 tracker fund seems to be a much better option than accepting the low rates offered by Cash ISAs today.
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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.