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Whether shares or cash, the contribution limit for an ISA is £20,000 per year. Depositing that every year and earning a 3% compounded annual return tax-free makes you a millionaire after 30 years.
Finding that amount of money to deposit is not easy. But for those aiming for a million, is it better to stick with cash or think about stocks?
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Money
There are many things I like about cash ISAs. The chances of losing money are much, much lower than with a stocks and shares ISA and there are some good interest rates available at the moment.
The best one I can find offers just over 5% a year, enough to turn £20,000 a year into £1 million in 25 years. The question, however, is how long this will last.
Cash ISAs have generated an average return of just over 1% over the last five years. And at that level, getting to a million on £20,000 a year becomes virtually impossible.
I'm certainly not against cash ISAs; in fact, some of my best friends have them. But I suspect that getting to a million probably requires a higher return than those things are going to deliver.
Actions
In my opinion, the answer to the question of whether a stocks and Shares ISA is better is that it depends. Specifically, it depends on what someone plans to put in it.
There are plenty of stocks I won't buy for my ISA. There are even some stocks that I think could be worse opportunities that keep my cash in cash for the long term.
Fortunately, I don't have to buy everything. I can limit myself to stocks that I expect to deliver much better returns than cash over the next few decades, such as Diageo (LSE: DGE).
Diageo currently returns the equivalent of 3.5% of its share price to shareholders each year in cash. While this is below the current 5% offered by the most generous cash ISA, it is much higher than the average 1%.
Diageo
The threat of US tariffs on imported goods could be a big challenge for Diageo. It is the company's largest market and there is no way to produce Scotch whiskey outside the UK.
However, I think investors who take a long-term view of stocks should be able to overcome this difficulty. For one thing, the possibility of tax increases may not be permanent.
Likewise, Diageo has some leading brands in important categories. And this should give it the ability to offset at least some of the effect of higher taxes by increasing its prices.
Ultimately, I think the company's strengths are enduring. That's why I see worries about issues that may last a few years as an opportunity to make an investment that could help me on the path to a million.
aiming for a million
I suspect that becoming an ISA millionaire by sticking to cash will prove impossible in the next 30 years. Current returns are undeniably good, but history suggests this won't last.
With a stocks and shares ISA, I think the returns come down to the investments someone chooses. In my case, Diageo is a stock that I intend to continue buying to try to build wealth over time.
