Cash ISA savings rates are looking pretty attractive right now. Certainly better than most of us expected at the start of the year.
Back in January, economists thought the Bank of England would cut interest rates at least two or three times in 2026, taking them from today’s 3.75% to as low as 3%. That’s not going to happen now as the war with Iran threatens another oil price and inflation shock.
That’s bad news for borrowers and the economy, but it’s good news for savers.
What can savers get today?
The best buy two-year fixed-rate Cash ISA currently pays 4.72% a year. That’s comfortably above June’s consumer price inflation rate of 2.6%. That means it should deliver a real return, no matter where inflation goes next.
The minimum investment is £10,000. Someone opening the account with that sum today would earn around £944 in tax-free interest by maturity, turning their savings into £10,944. They mustn’t touch the money in that time. Early withdrawals incur a penalty equal to 150 days’ interest.
I can see one big drawback. While cash is ideal for short-term savings it simply cannot match the long-term wealth-building power of the stock market. According to financial website Unbiased, the average Stocks and Shares ISA has delivered an annual total return of 9.64% over the last decade, with dividends reinvested.
That’s why all my long-term savings are invested in individual FTSE 100 and FTSE 250 shares. Over the last three years I’ve achieved an annual compound return of 18.7%.
That’s comfortably ahead of the market. Naturally, there’s no guarantee it’ll continue. Shares have enjoyed a strong run and a market correction or crash could quickly change the picture. Even so, history shows that few assets have matched equities over the long term.
Why I think shares are better
One investment I’m particularly pleased I bought is Scottish Mortgage Investment Trust (LSE: SMT). This FTSE 100-listed investment trust backs fast-growing companies that it believes will transform industries and society.
The Scottish Mortgage share price has jumped 86% over the last three years, and that’s despite falling 11.5% in the last month. Both the spectacular rise and recent wobble have been fuelled by a single holding: Elon Musk’s Space Exploration Technologies Corporation, better known as SpaceX.
Scottish Mortgage first bought SpaceX in 2018, when it was still privately owned. By 30 June it had grown to around a quarter of the trust’s portfolio after excitement surrounding the company’s record-breaking stock market debut on 12 June.
SpaceX may grab the headlines, but Scottish Mortgage also owns stakes in top US tech stocks such as Nvidia and Amazon. The trust is likely to remain volatile, especially while investors debate whether artificial intelligence will revolutionise productivity or a bubble is waiting to burst.
Scottish Mortgage isn’t for everyone. But I think it’s worth considering for long-term investors who want more growth potential than a Cash ISA can offer, and who can withstand a few bumps along the way.
Should you invest £5,000 in Scottish Mortgage Investment Trust Plc right now?
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Harvey Jones owns shares in Scottish Mortgage Investment Trust.
