According to my research, at the time of writing, the best interest rate on offer for savers who want to put their money in a Cash ISA is just 1.46%.
This is the best easy-access ISA rate on the market, and it comes from Virgin Money (LON:VM). You are allowed to make two withdrawals per calendar year, and you can open an account with just £1.
If you are happy to lock your money away for a bit longer, you can achieve a higher interest rate, but not by much.
For example, if you are happy to lock your money away for two years, challenger bank Aldermore (LON:ALD) offers a rate of 1.75%. And if you’re happy to lock your money away for three years, Aldermore will pay you 1.85%.
Lagging inflation What is quite shocking is that none of these accounts offers a rate of interest that even matches the current rate of consumer price inflation (CPI), which currently sits around 2.1%. CPI has averaged around 2.2% for the past year.
On this basis, if you had opened a Virgin Money ISA 12 months ago, today your money would be worth approximately 0.74% less than it was at the time you made the deposit. In other words, putting your money in a Cash ISA will only hurt, not help your savings situation.
In my opinion, the best solution for this problem is to invest your money in the FTSE 100. Why is the FTSE 100 better place to invest than a cash ISA? Well, it all comes down to the fact that most companies can increase the price of their goods and services in line with inflation.
As a result, sales and profits tend to increase with inflation, and so do earnings and dividends. Therefore, stock prices tend to grow at or above the rate of inflation over the long term, protecting you from the scourge of rising prices.
Bank-beating income Even if the FTSE 100 does not go anywhere over the next 10 years, it offers a level of income that makes the return on cash ISAs look like peanuts. At the time of writing, the UK’s leading blue-chip index supports a dividend yield of 4.6%, nearly double the rate of inflation.
Another way to protect your money from inflation is to invest it in single stocks. Blue-chip dividend champions are the perfect solution for this, particularly companies with a broad global footprint and pricing power.
However, I should warn that picking single stocks can be a time-consuming and volatile process. So, if you are looking for steady, inflation-beating returns, the FTSE 100 is probably the best bet.
The road to riches Over the past 10 years, the UK’s leading blue-chip stock index has produced an average annual return for investors of 8%, turning every £1,000 invested into £2,191. Over the same timeframe, £1,000 invested in a Cash ISA with an interest rate of 1.46% has grown to be worth just £1,157. From this example alone, it is clear which investment offers better returns.
Over 20 years, £20,000 a year (the current maximum ISA contribution) saved in a cash ISA at an interest rate of 1.46% would grow to be worth £464,640 according to my calculations. The same amount of cash invested in the FTSE 100 over the same time frame would, according to my figures, yield a total saving pot of £972,501.
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.
Motley Fool UK 2019