With a Cash ISA or a Stocks and Shares ISA, UK residents can retain 100% of the capital gains they earn tax-free. But that doesn’t mean they offer the same value in terms of potential returns.

Studies show that over 10 years, a Stocks and Shares ISA can return up to four times more on average than a Cash ISA. Recently, high interest rates have made Cash ISAs more attractive. But with the Bank of England eyeing further interest rate cuts, those days may soon be over.

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.

Of course, it’s not that black and white. Self-directed investments in stocks carry risk, particularly for inexperienced investors. To avoid getting stuck in a value trap, it’s critical to conduct sufficient market research and pick the right stocks.

Cash ISA returns

With a Cash ISA, investors will be able to net interest of around 4.5% at current rates. Even if that rate held, about £400,000 would need to be held in the ISA to return £50 per day (£1,500 a month).

For a dedicated investor who puts £500 a month in the ISA, it would take around 31 years to reach £400k (by compounding the returns).

Stock market returns

Unlike a Cash ISA, returns on stocks are not fixed so we can only work on averages. According to research by AJ Bell, the average rate of return on a Stocks and Shares ISA is 9.6%.

At that rate, it would only need £187,500 invested to return £1,500 a month. By investing £500 a month, it would take 21 years. 

£500 too much? Investing £250 a month would only take 27 years.

At that point, an investor could withdraw £1,500 a month or move the investment into a portfolio of dividend shares that make regular payments.

Again, this is an average and the actual rate an individual investor experiences could be higher or lower. In addition, there’s the added risk of a market crash bringing the entire value down.

Considering stocks

For investors willing to accept the risk, a self-directed ISA is the clear option. One type of asset that many early investors choose to simplify stock picking is an investment trust.

These typically provide exposure to a balanced portfolio of shares picked by an experienced fund manager.

F&C Investment Trust (LSE: FCIT) is one of the longest-running investment trusts in the UK. It was founded in 1868 as the first world’s first collective investment scheme.

The fund invests in a diversified mix of shares and assets, making it more resilient to risk in specific industries or countries. However, it is still weighted more towards US tech stocks than other sectors. Think Nvidia, Apple, Microsoft… the usual suspects. A slump in this sector would hurt the stock price. 

Moreover, there’s always a risk the fund manager makes bad decisions, hurting the fund’s performance. 

The fund also incurs an annual charge of 0.3% and an ongoing charge of 0.8%. Since January 2005, its stock price has climbed 497.4%, equated to an annualised growth of 9.35% per year. In addition to the price growth, it pays a regular and reliable dividend with a yield typically around 1.3%.

I’m yet to invest in the fund as I haven’t got the spare cash currently, but I think it’s a great one to consider for long-term value investors.