How investing in a Cash ISA could cost you a comfortable retirement

Cash ISAs are hugely popular, and it’s not difficult to see why. All interest you make is protected from the tax authorities, and so are withdrawals. According to UK Parliament,

Some 14.4 million people hold a Cash ISA and no other type of ISA.

That equates to almost half the country’s population of working adults. And I must confess: it’s a number that chills me to the bone. Want to know why?

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Wealth destroyers?

Let me get something out of the way immediately. I think saving money is a good idea, and have a Cash ISA myself. The problem is that prioritising cash savings over other investments could costs millions of people a shot at a comfortable retirement.

The Quoted Companies Alliance (QCA) echoes my concern that an overreliance on hoarding cash is quietly destroying savers’ wealth. It says that:

There is approximately £300bn sitting in Cash ISAs, which are often invested unproductively [and] providing savers with poor returns. These ISAs could yield better results if they were invested into more volatile Stocks and Shares ISAs.

Since 2010, the Cash ISA has delivered an average annual return of 1.79%, according to Moneyfacts. That’s a pretty dire return by any stretch of the imagination — a balance of £10,000 at the start of the period would be worth just £13,313, today.

Double your money

The QCA’s right in that Stocks and Shares ISAs can be more volatile. My own ISA dropped sharply earlier this year when the Iran War began, stoking market worries over inflation and growth.

But longer term, the investing version of the ISA provides significantly better returns when temporary market swings are balanced out. Moneyfacts says the average yearly return here is 6.79% since 2010. The result? A £10k Stocks and Shares ISA balance 16 years ago would be worth £29,545 today.

That’s more than double what the Cash ISA would have generated. Add in regular contributions and spread out the timeframe to boost compounding, and the difference is still greater.

At 1.79%, a £10,000 lump sum and monthly savings of £300 thereafter would generate a Cash ISA worth £159,931 after 30 years. In a Stocks and Shares ISA at 6.79%, the amount would be £427,418.

A 16.7% opportunity?

Past performance isn’t always a reliable guide to future returns. But I’m confident a diversified stocks portfolio will continue to deliver individuals with better returns for retirement. Indeed, the 6.79% average return on the ISA since 2010 is below the longer-term average of closer to 9%.

It’s can be easy to get started with a Stocks and Shares ISA too, with the help of investment trusts. The JPMorgan American Investment Trust (LSE:JAM) is one to consider that spreads investors’ capital to great effect.

Over 10 years, it’s delivered a stunning 16.7% average annual return. That would have turned a £10,000 investment in June 2015 into £52,514 today.

JP Morgan American is focused solely on the US stock market, and more specifically S&P 500 shares. This means less geographical diversification than more global funds. Yet by spreading investors’ cash across 280 different companies across industries, it still offers a highly effective way to target huge returns while still balancing risk.

A Cash ISA might feel like the safer bet for savers. But in reality, buying trusts like this in a Stocks and Shares ISA can make retiring in comfort a far more realistic goal.

Should you invest £5,000 in JPMorgan American Investment Trust Plc right now?

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Royston Wild does not hold any positions in the companies mentioned.