UK Markets open in 5 hrs 55 mins

Why I’ll be avoiding a Cash ISA in 2020

Edward Sheldon, CFA
Piggy bank next to a financial report

Cash ISAs are very popular with UK savers. At the end of the 2017/18 financial year, Britons had nearly £300m parked in them.

Personally though, I see very little appeal in Cash ISAs at present, particularly where long-term savings are concerned. All things considered, I believe there are much better places to park my money.

Shocking interest rates

The main reason that I’m not a fan of Cash ISAs is that the interest rates on offer from them at the moment are absolutely abysmal. Right now, the best interest rate you can get on a Cash ISA is around 1.35%. That’s terrible. Save £10K into a Cash ISA paying 1.35% and you’re looking at annual interest of just £135. That’s hardly going to boost your wealth, is it?

Factoring in inflation (rising prices of goods and services over time), which has averaged around 1.8% per year over the last six months in the UK, money growing at that kind of low interest rate is actually going backwards. This means that anyone who has their money saved in a Cash ISA is actually getting poorer in real terms over time.

I’ll also point out that you can now earn up to £1,000 on your savings income-tax-free, outside an ISA, due to the ‘personal savings allowance’. What this means is that you’d need to have around £75,000 invested in a Cash ISA (assuming interest rates of 1.35%) to actually benefit from a tax perspective.

Given the shockingly-low interest rates on offer, Cash ISAs just aren’t worth it, in my view.

The potential for much higher returns

One ISA I do like, however, is the Stocks & Shares ISA. Like the Cash version, this ISA has an allowance of £20,000 and enables you to shelter your money from the taxman. However, the key advantage of this one is that it enables you to hold a wide range of growth investments such as shares and funds, which means that it’s a far more powerful savings vehicle than the Cash ISA.

With a Stocks & Shares ISA, you have lots of great investment options. For example, you could potentially invest in the Fundsmith Equity fund – a global equity fund that invests in leading companies around the world and has returned around 130% over the last five years.

Alternatively, you could pick your own stocks. You could put together a portfolio of dividend stocks and create a passive income (right now, there are plenty of FTSE 100 dividend stocks yielding around 5% to 6%) or you could go for growth stocks that may be capable of doubling your money in a short period of time.

Ultimately, a Stocks & Shares ISA has the potential to boost your wealth far more quickly than a Cash ISA. Given the choice between a Cash ISA that pays around 1.35% or a Stocks & Shares ISA that offers exposure to a wide range of investments, I think the latter is a no-brainer.

More reading

Edward Sheldon has a position in the Fundsmith Equity fund. 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.

Motley Fool UK 2019