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Every UK adult can tuck away up to £20,000 in a Cash ISA this financial year, if they have it. That changes from next April, when the annual subscription limit for the under-65s is cut to £12,000. Many savers are keen to max out this year’s Cash ISA allowance but is that really the right thing to do?
The Cash ISA is the ideal home for short-term savings. But anybody looking to build long-term wealth is likely to get a far superior return from a Stocks and Shares ISA. Equities are more volatile in the short term, but history shows they easily outperform cash over time. The performance gap may surprise you.
Can my Cash ISA keep up with the stock market?
Research body Investing Insiders calculates that over the last decade, the average Cash ISA returned 4% a year. By contrast, the average Stocks and Shares ISA returned 9.5% a year, with dividends reinvested. Let’s see what that means in practice.
Ten years ago in 2016, the annual ISA contribution limit was £15,240. Let’s say somebody put half of that — £7,620 — in cash and the other half in shares. Here’s what they’d have today:
- Cash ISA value: £11,279
- Stocks and Shares ISA value: £18,884
Equities would have delivered an extra £7,605, but the eye-dropping difference comes over much longer periods. Let’s see what happens if they leave their money for 30 years:
- Cash ISA value: £24,715
- Stocks and Shares ISA value: £115,979
The stock market would have delivered a stunning £91,264 more. That’s even bigger than I expected. Which shows the long-term power of compound investing.
Right now, a popular way to build a Stocks and Shares ISA is to invest in a spread of FTSE 100 shares offering both dividend income and growth.
What does this FTSE 100 stock have to offer?
One blue-chip stock that’s delivered both in spades is insurer and asset manager Aviva (LSE: AV). Over the last five years, its shares have climbed 55%. Typically, it’s yielded 6% a year on top, through regular dividends. That lifts the total return to around 90%, with dividends reinvested.
Aviva doesn’t just pay a high income, but one that rises regularly. Over the last five years, it’s increased dividends at an average rate of 13.35% a year. They’ve been racing ahead of inflation in real terms. Dividends aren’t guaranteed though.
Stock markets have been bumpy lately, and Aviva’s shares have dipped 9% over the last six months. This may be an opportunity to get in at a reduced price. The forward price-to-earnings ratio is a modest 12.1, which is reasonable value. As always with shares there are risks, as investors await events in Iran. Aviva also has to battle for business in a competitive market, and the UK economy is struggling.
Yet I believe this is a well-run company that should benefit as the population gets older and needs more pension and retirement products. I think it’s a compelling long-term opportunity for Stocks and Shares ISA investors to think about. And there are plenty more great value FTSE 100 stocks I’ll consider today.
This story originally appeared on Motley Fool
