If you are a saver with a share in that £269 billion cash squirrelled away in ISAs, you could be making a big financial mistake.
ISAs offer miserable returns on cash savings – meagre interest rates of around 1%.
These sort of low interest returns from the banks and building societies make ISAs poor long-term investments.
But 46% of savers opt for keeping cash in an ISA when they could do so much more with their money.
Keeping savings in cash is a good idea for the short-term, but if you want to lock your money away for more than five years, then forget cash ISAs.
Spending power
It’s likely if you keep your money in a cash ISA for more than a year or two, your savings will go backwards thanks to inflation.
Inflation is about your spending power with the money you have saved.
If prices increase at a rate of 2.5% a year, then your cash savings need to grow at a faster rate for your spending power to outstrip the rising cost of living.
The longer cash is kept in an ISA and the cost of living rises, the weaker a saver’s spending power becomes.
Stick £20,000 in an ISA for 10 years at an interest rate of 1% and inflation running at 2.5% and the rate of return is -1.5% a year. Your spending power at the start is £20,000, but this drops to below £17,500 at the end of the term.
Taking away risk
A better option is a stocks and shares ISA which lets you stake money in a fund or directly into shares.
Most financial experts recommend a FTSE tracker fund, which does what it say – mirrors rises and falls in the FTSE.
On average, the best trackers have yielded 25% in recent years, although this past performance is no guarantee of future profits.
Cash ISAs are OK for stashing savings for a year or two. They take away the risk of a falling market wiping out your savings if you are stationing money for a while with the intention of paying off a mortgage or other debt.
In this case, a minor 1% or 2% bite out of your savings is not such a big deal.
