Someone with spare cash may see savings accounts as a no brainer option for their money. With interest rates well above their 10-year average, products like the Cash ISA can provide savers with a decent second income without them having to put their cash in danger.
Someone who parks £9,000 in a 5%-paying instant access Cash ISA knows their balance will never fall below this level. And unless the savings rate changes, they will bank £450 in interest.
Over 30 years, their balance would grow to £40,210, assuming that they make no withdrawals in that time. If they put their cash in a higher-yielding fixed term Cash ISA, they could make even more.
Yet, while their initial balance is protected, investing in a savings account isn’t risk free. In fact, prioritising one of these financial products over, say, a Stocks and Shares ISA, could end up wrecking their chances of retiring in comfort.
Poor returns
This is because, for most people, the return on a savings account is unlikely to provide a substantial enough passive income in later life.
Let’s say that a saver parks £9,000 in a Cash ISA, and adds £350 to it each month for 30 years. After this period, they’d have a balance of £331,500, which would then provide a £13,260 annual second income, assuming they drew down 4% from their savings each year.
Even with the State Pension added, this is unlikely to allow the saver to retire comfortably. The Pension and Lifetime Savings Association (PLSA) puts the exact figure they’d need each year for a comfortable retirement at £43,100.
A better option
A better option could be to hold a Cash ISA, but to use the majority of their cash to buy shares, funds, and trusts in their Stocks and Shares ISA or Self-Invested Personal Pension (SIPP).
If they can achieve an average annual return of 9%, which I think is realistic, their £9,000 initial lump sum and £300 monthly top-up should make them £773,335 after 30 years.
Drawing down at 4% a year, they’ll have a regular second income of £30,933. With the State Pension combined, there’s a great chance the investor will be able to hit the PLSA’s target for a comfortable retirement.
A top tech trust
This shares-focused investing strategy puts an individual’s money in greater peril than if they just bunged it in a savings account. But the potentially life-changing returns make it worth serious consideration in my book.
Investors can reduce the risk to their capital by investing in a trust, too. Polar Capital Technology Trust (LSE:PCT), for example, holds shares in 102 different companies.
Major holdings here include chipmaker Nvidia, software developer Microsoft, and social media giant Meta.
Technology trusts like this are highly cyclical in nature. And so they can produce disappointing returns during economic downturns.
Yet for long-term investors, I think Polar is still worth serious consideration. Past performance is not always reliable guide to the future. But the trust has delivered a stunning average annual return of 13.4% since its founding in 1996.
Fast-growing sectors like AI, robotics, green technology, and quantum computing all suggest Polar’s trust could keep delivering brilliant returns.
This post was originally published on Motley Fool
