I recently read an article stating that cash ISA is still the king. This was a big surprise to me. I didn’t realise how many people would choose cash ISAs over other available options. There is a really long list of alternatives available. The unfortunate reality is – cash ISAs are actually losing you money.
For those of you not fully aware of different types of ISAs available – please read this article.
is cash isa really the king?
According to HMRC the latest cash ISA usage stands at 66%. This is a drop of 9% versus prior year. This data is up to March 2021. You can read the full article on these figures here.
That was a periods of time when the Bank of England kept their interest rates pretty much at zero. What most ISA account holding financial institutions did – they added 0.2% or so on top of central banks interest rate.
What this meant is that by holding your savings in a cash ISA you were making around 0.5% interest per year at best. These returns are far from great. It is no doubt better than holding the savings under the pillow at home. You could however do so much better with your money.
do I actually lose money in cash isa?
The above makes you question why did I say that you were losing money in a cash ISA. When it comes to making money there is a complexity of a silent killer called the inflation. You can read more about the costs of inflation here.
2018 to 2020 the inflation in the UK was between 1% and 3%. If the returns you were making on your investments were below these figures in real terms you were losing the buying power.
Investment ISA was a whole different story. Going for a simple market index investing would have improved your returns significantly. For example, the S&P 500 returned roughly 50% in the same period of time.
should I move my savings outside of cash isa?
It is really hard to know what is the right thing to do going forward. If I had a crystal ball I would have been a millionaire by now. There are some things you should however consider.
The inflation rates are forecasted to get to early double-digit territory in the coming months. Finding ways to increase the returns on your investments is vital. Doing nothing can cost you over 10% in terms of your buying power.
As inflation is skyrocketing the Bank of England is increasing its interest rate. This will clearly benefit all of the cash ISA savers. The same logic as above applies. Banks take the government set interest rate and add some on top.
The picture isn’t that pretty overall though. With inflation nearing 10% the current cash ISA returns stand at roughly 1.2% to 1.3%. You can get this as high as 2% to 2.5% if you’re willing to lock your cash for a long term.
While cash ISA isn’t getting even near the inflation rate the returns you can get there are better than doing nothing.
so what about the bonds?
Bonds can be a slightly better alternative. The interest rates on these are currently standing at around 3%. This doesn’t beat the inflation rate surely but it helps you to offset some of those losses.
The biggest watch out here is what the government is planning to do next with its interest rates. If the interest rate goes up the value of existing bonds has to go down. This happens to make them equally as attractive as the new bonds coming to the market. However, this is only an issue if you decide to sell early. You don’t have this problem if you hold the bond till it’s maturity.
are there any other options to cash isa?
Another alternative to consider is the stock market. One thing to keep in mind – the current market volatility isn’t great. Your investments are at great risk. With that in mind, there are couple of strategies I personally would evaluate.
Below I will describe a couple of different strategies I personally would consider in the stock market right now. These will vary from indexes, high paying dividends stocks as well as commodities.
investing in index
As of right now some of the major indexes are significantly suppressed. S&P 500 and FTSE 100 can currently be picked up at bargain prices. You do have to keep in mind that there is a real possibility of further drops.
For those of you willing to invest for a long term that shouldn’t be an issue. You are highly likely to see very generous returns if you stay invested for a long period of time. And this isn’t all of it.
As an example, FTSE 100 is currently offering roughly 3.5% dividend payment. Not only you can expect your investment to appreciate over time but also will be rewarded with dividends over time. The dividend doesn’t get near the inflation rate unfortunately. It does however beat both the cash ISA and bond interests rates.
On top of this, there is an opportunity for you to benefit from the price recovery. This combined with the dividends can make the situation much more exciting.
dividend stocks
Another alternative for you to have a look into are high paying dividend stocks. Some of the commodity miners are offering high single digit or even low double digit dividends right now. Some of these are also fairly under valued. This could potentially become a nice cherry on top for you.
With the Central Bank of England increasing the interest rates there might be an opportunity in banking sector as well. Most shares of the major banks currently seem to be undervalued. With interest rates rising the profits of these surely will go up.
This can drive the value of the shares up. This also gives banks an opportunity to make their dividends somewhat more attractive. Current dividend yields are in the 3.5-5% region. This can become way more attractive fairly quick. There is a potential benefit of share prices moving up as a result of it as well.
The biggest advice I would give – pick a diversified portfolio and don’t put all your money in one company or even the same sector. These have a tendency of moving in the same direction.
commodities – historic inflation hedge
Commodities historically been a great hedge against rising inflation rates. Precious metals like silver and gold have often performed really well in periods of uncertainty.
These unfortunately don’t pay dividends. You are solely relying on the value of these going up. These can often be seen as more secure types of investment as they are less volatile.
summary
While cash ISAs are still by far the most popular way to invest I personally would encourage you to look further. The current returns you are getting very far from the inflation rates we are seeing. There is a real opportunity to find better ways to make money.
The current returns on cash ISAs is below 2%. Commodities, shares or indexes can offer you enhanced returns. With shares and indexes currently being fairly undervalued you can expect generous returns. Dividends can make the journey even more pleasant.
One last thing to keep in mind – the past performance of any markets is not a guaranty of the same pattern happening again. Be careful when investing and don’t use the money you can’t afford to lose.