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It’s tough to keep tabs on which Cash ISA providers offer the best savings rates at any one time. We all lead busy lives, and being on top of who’s offering the highest rate isn’t usually a priority.
What’s more, ISA rates continuously change over time, reflecting Bank of England interest rates changes and increasing competition in the savings market.
Yet failing to keep up with changes in the Cash ISA market could cost you a small fortune. I’ll explain how, before revealing what I think could be a better way to make your savings work for you.
Lost ISA cash
According to Skipton Building Society, a whopping £85.5bn is currently held in instant-access products with paltry yields of 1.94% or below. To put that into context, that’s less than half of what many Cash ISAs currently pay out.
The result? Collectively, savers in these products are losing out on £1.7bn every year compared to accessing accounts offering a 3.9% interest rate.
It’s not difficult to see the appeal of the Cash ISA. They’re simple, low-risk, and crucially save you paying a penny in tax on your interest. But there is a massive cost to using these products…
What is it?
Put simply, those who prioritise these cash accounts are in danger of not having enough money in retirement. Let’s use the example of someone who has a spare £500 at the end of each month.
If they put this into a Cash ISA, they’d have £175,057 after 25 years, based on the 1.2% average savings rate of the last 10 years. I couldn’t imagine being able to retire on a nest egg this small. Could you?
Now let’s look at what a Stocks and Shares ISA could have produced in that time. Based on the average annual stock market return of 9.6%, our saver would have £619,901. That’s more like it.
Here’s what I’m doing
This wealth gap’s the reason I use most of my spare cash to buy shares and exchange-traded funds (ETFs). I do so with products that give me similar tax benefits as the Cash ISA. And I hold a diversified range of assets to significantly reduce the greater risk I take on.
One fund I own is the Xtrackers World Momentum ETF (LSE:XDEM). It’s not immune to stock market downturns. However, it spreads my cash across 350 global companies to provide a steady return over time.
Over 10 years, it’s delivered a staggering average annual return of 15.4%. This is thanks to the staggering profits growth of tech shares, which make up roughly a third of the fund.
At the same time, it’s balanced with other sectors like financial services, industrials and consumer goods for stability. Diversification across US, Canadian, Japanese and European stock markets gives the fund added steel.
I think ETFs like this are a great option for Cash ISA users looking to get into stock investing to consider. The following dividend-paying stock also deserves consideration as part of a diversified portfolio…
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Royston Wild owns shares in Xtrackers World Momentum ETF.
This story originally appeared on Motley Fool
