Cash ISAs have continued to be highly popular in the last decade. Thats despite low interest rates causing their returns to be less than inflation, in many cases, and tax changes having made them relatively unappealing versus savings accounts.
By contrast, the FTSE 100 has experienced a bull market thats seen its price level more than double at its peak from its 2009 lows. And, since it trades on what appears to be a low valuation, it could offer scope for further capital growth in the coming years.
As such, now could be the right time to switch from a Cash ISA to buying FTSE 100 shares. They may produce higher returns in the long run.
Cash ISA prospects
With interest rates having been close to historic lows for around a decade, the returns on a Cash ISA have been exceptionally disappointing. At present, an annual income return of around 1.5% is probably the best that can be found among easy-access Cash ISAs. Assuming that rate of return over a 10-year period, a 1,000 investment in a Cash ISA would eventually be worth around 1,160.
Of course, this assumes interest rates wont move higher in the coming years. While theres the potential for them to do so, low inflation and an uncertain outlook for the UK economy mean the Bank of England may decide to maintain a dovish stance on interest rates. This may lead to a reduction in spending power for savers, since the rate of inflation may continue to be ahead of the interest rate on Cash ISAs over the coming years.
Additionally, 1,000 in interest income from cash held outside a Cash ISA is now tax-free each year. This means the tax efficiency of a Cash ISA has become obsolete for all but those savers with large deposits.
FTSE 100 potential
Although the FTSE 100 may have risen sharply in the last decade, its track record shows investors can expect a high-single digit annualised total return in the long run.
Certainly, such a return isnt achievable in every calendar year. Risks and uncertainties can lead to short-term disappointments. However, the world economys growth rate is expected to improve in 2020 versus 2019. With the FTSE 100 appearing to offer good value for money, its growth outlook may be impressive.
In fact, its somewhat surprising the FTSE 100 has a dividend yield of over 4% after a decade-long bull market. Even more unexpected is the fact many of its largest companies trade on valuations that are significantly below their long-term averages. This could mean they offer the prospect of improved share price performance, which could translate into higher returns for investors.
Therefore, while a Cash ISA may seem to be attractive due to its lower risks, the return potential of the FTSE 100 may mean now is the right time to pivot from cash towards large-cap shares.
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