For years, I’ve watched UK interest rates hover between 0% and 1%. With returns that low, I have funnelled most of my savings into a Stocks and Shares ISA rather than a Cash ISA.
But I might have changed my mind last Thursday, as the Bank of England raised rates yet again to 4.5%. I can now receive more from savings accounts than at any point since 2008.
Do these higher returns now mean a Cash ISA is a better place to build wealth than a Stocks and Shares ISA? Here’s my answer to that question, along with what I plan to do about the new rates.
The problem with banks
The most important thing to bear in mind here is that I probably won’t get the full 4.5% from a Cash ISA.
The reason? Banks take a slice for themselves. They don’t typically pass on the full amount to customers.
In fact, I received an email this week from a well-known UK high-street bank about the new rates. It has generously nudged the return in my Cash ISA up to 1.25%.
To be fair, most aren’t quite that bad. The highest returns I can find at the moment are 3%-3.5% for an easy-access account, and 4%-4.3% for a fixed-rate account. With that in mind, how does it compare to a Stocks and Shares ISA?
Higher potential return
An important difference with the Stocks and Shares ISA is the risk. My return is tied to the success of the company I choose to invest in. Most firms have bad years or decades, and some even go bankrupt.
That risk is paired with a much higher potential return than a Cash ISA though, even at the new rates.
Historical average returns including all dividends and growth are around 8%-10% for large UK and US companies.
And investing in individual companies can increase that further. To take one example, British American Tobacco has returned around 13.5% since 1984.
What I’m doing
So which account is better? Well, the Cash ISA offers a steady, predictable return.
And because I can now get up to 4% or so, I opened an account and deposited a small sum of cash – an emergency fund, some call it – that I’d like easy access to.
But most of my savings will still get thrown into a Stocks and Shares ISA. This back-of-the-envelope calculation shows why.
If I save £100 a month for 30 years in a 4% Cash ISA then I’d have £68,527. But the same £100 a month for 30 years at a 10% return in a Stocks and Shares ISA becomes £206,284.
To me, that’s a staggering difference. And returns have the potential to get even higher.
Numero uno
My preferred strategy is to make careful, well-researched investments that might accelerate that wealth-building. If I can choose companies that could bump my average return up to 12%? The £100 a month over 30 years is now £305,201.
All in all, when it comes to options for building wealth, I think investing in companies in a Stocks and Shares ISA is still easily numero uno.
The post Interest rates at 4.5%! Can I now earn more with a Cash ISA than a Stocks and Shares ISA? appeared first on The Motley Fool UK.
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John Fieldsend has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.