It might seem mighty tempting to stash your savings in a Cash ISA today. UK share markets have endured a wild time in 2020 as the coronavirus crisis has persisted. As a consequence a great many stock pickers have seen the value of their investments fall off a cliff.
None of this matters to me, however. Nor does the possibility of more volatility in 2021. I’ll continue to invest in my Stocks and Shares ISA despite the gloomy economic outlook.
Cash vs UK shares
Fans of cash products like Cash ISAs like the peace of mind that they apparently provide. If I invested £20,000 at the start of the year I’d still have that (possibly some accrued interest, too) to call upon today.
Let’s say I’d invested in something like a FTSE 100 tracker fund instead. Britain’s blue chip UK share index is down 16% from the start of 2020. This means that my £20,000 on 1 January would have been whittled down to approximately £16,800. Plummeting dividend payments in 2020 mean that income flows from that tracker wouldn’t have taken much of the sting out of that huge fall either.
Awful cash returns
This would cause a colossal problem if I wanted to draw on that cash today. But I don’t. I buy UK shares with a view to holding them for at least a decade. Over this sort of timeframe it’s been proven that products like Stocks and Shares ISAs provide much meatier returns than their cash equivalents.
Interest rates from Cash ISAs over the past decade have lagged their historical norms by a large distance. And things have taken a turn for the worse this year as Threadneedle Street cut rates to record lows following the economic downturn.
As a consequence, the best-paying instant-access Cash ISA on the market offers an interest rate of just 0.95%. It’s unlikely that rates will improve from Cynergy Bank’s market-leading product any time soon, either. Ultra-low Bank of England benchmark rates appear here to stay. It’s possible they might even turn negative. This is why investing in UK shares is a much better way to use one’s cash today.
Sticking with stocks
Let’s assume that Cynergy Bank’s rates remain in place for the next decade. Someone who saves £300 a month in that Cash ISA can expect to make around £37,740 in that time.
By comparison, someone who invested that money in UK shares could have expected to have made as much as £59,960 by 2031. This is because the average yearly return sits at between 8% and 10% for long-term investors.
But that £22,000-plus difference is chicken feed compared to the gulf that can emerge after three-and-a-half decades of saving. A Cash ISA saver aged 30 can expect to have made around £149,300 by the time they’re 65, based on that 0.95% interest rate. They could have made a cool £1.02m if they’d invested that £300 a month in a Stocks and Shares ISA instead. It’s no exaggeration to describe the difference between those two sums as life changing.
As I say, 2020 has been a tough time for UK share pickers. But the economy will bounce back eventually and so will stock markets. In fact, those that invest after the recent stock market crash can supercharge their returns. Experts like The Motley Fool are here to tell you how.
The post Forget Cash ISAs! I’ll be building a £1m Stocks and Shares ISA with UK shares in 2021 appeared first on The Motley Fool UK.
Royston Wild has no position in any of the shares 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 2020