The Cash ISA is a terrific home for short-term savings. Unlike a standard bank account, all the interest is free of tax, regardless of your income or how much interest you earn each year.
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.
By contrast, interest from a standard savings account may be taxable, depending on your circumstances. Under the personal savings allowance, or PSA, a basic-rate 20% taxpayer can only earn £1,000 of interest free of tax each year. The PSA shrinks to £500 for higher-rate 40% taxpayers, while additional-rate 45% taxpayers don’t get one at all.
What kind of rate can you get today?
Cash ISA rates are pretty decent right now. Charter Savings Bank, for example, pays a market-leading 4.63% on its one-year fixed-rate Cash ISA. The minimum deposit is £5,000, and at that rate savers would earn £231.50 when it matures towards the end of July next year.
However, I see a couple of problems with the Cash ISA. First, the annual allowance will be cut to £12,000 from next April for those under 65. That’s because the government wants to encourage younger savers to put more money into the stock market. Which brings me to the second issue. Looking at the longer run, history suggests that a Stocks and Shares ISA will build your wealth a lot faster than cash.
In the last 10 years, the average Stocks and Shares ISA has grown by 9.64% a year, with dividends reinvested, according to financial adviser site Unbiased. Over the same timeframe, the average Cash ISA returned just 1.21%. Interest rates are higher today, so that’s a little misleading. But you only benefit if you regularly shop around for the best deal, and too many savers don’t. For me, shares are the way to go.
Have NatWest shares beaten cash?
I’m investing my retirement savings in a spread of FTSE 100 and FTSE 250 stocks, such as NatWest Group (LSE: NWG).
The FTSE 100 bank has been whipping up a storm lately. Its shares are up 36% over the last 12 months and a stunning 230% over five years. It also pays dividends, with the trailing yield currently 4.8%. If reinvested, they’d lift the five-year return towards 250%.
Share price growth isn’t guaranteed, of course. Nor are dividends. NatWest’s recent profits have been boosted by higher interest rates, which allow it to widen the margin between what it pays savers and charges borrowers. If interest rates fall, those margins could retreat.
What’s the dividend outlook like?
The struggling UK economy could also hit demand for loans and drive up bad debts. Then there’s the threat of a windfall tax on banks. This uncertainty may be one reason why NatWest shares still look good value despite their strong run. The price-to-earnings ratio is just 10, well below the FTSE 100 average P/E ratio of around 16.5.
That dividend is also expected to grow steadily. The forecast yield for 2026 is 5.28%, rising to 5.95% in 2027. Which smashes cash on its own.
I think NatWest is well worth considering today. In fact, I’ve bought it twice myself in recent months.
Should you invest £5,000 in NatWest Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group Plc made the list?
Harvey Jones owns shares in HSBC.
This story originally appeared on Motley Fool
