Cash ISA Vs. Stocks and Shares ISA
If you have money to put aside and want to give it the best chance to grow in value over time, ISAs are among the best products currently available to help you reach your savings goals. But is it better to put your savings into stocks and shares or cash?
This simple guide should help you decide whether you’d be better suited to investing in a cash or stocks and shares ISA (or a combination of both), as well as what alternatives might be available if neither option is quite the right fit.
We will cover the following topics:
A cash ISA is essentially a normal savings account, but with the added benefit of a tax-free element that allows you to earn interest without having to pay tax on it. This is also true for stocks and shares ISAs, but instead of being held in cash, the money you put into stocks and shares or ‘investment’ ISA is invested in equities that are traded on the stock market.
How much can you put in?
You can put up to £20,000 a year into a stocks & shares or cash ISA tax free in the 2020-21 tax year, with interest added on automatically at the end of that period. This allowance is reviewed annually and may change again in the future.
Which is better?
This will depend to a large extent on personal factors such as your appetite for risk, the amount of time you want to keep money aside in savings and how much you can afford to put away without immediate access to those funds should you need to raise cash quickly.
While interest rates remain low, traditional savings accounts don’t offer much in the way of returns on cash, so if you have some to put aside it makes sense to make the most of the tax-free facilities on offer, either with cash or stocks & shares ISA.
The summary below sets out their main pros and cons, but please don’t hesitate to make an enquiry if you’d prefer to talk your options through with an independent expert.
Pros and cons of a cash ISA
The biggest advantage of cash ISAs is that they are a very safe choice: you can’t lose the money you put in, and you should make some gains in the form of tax free interest. Most cash ISAs are also instant access, so whenever you need to dip into your savings, you can simply transfer it to another account.
The main drawback of cash ISAs is that while they’re tax free, they cannot attract a significant amount of interest while rates are low, so for the time being at least, you should not expect to see a huge return on your investment at the end of the year. Plus with low interest rates the effect of inflation is a factor to consider.
The main attraction of stocks & shares ISAs is the potential for a greater return on your investment: if your stocks perform well, you’ll benefit from much higher rates of interest on your savings.
However, this means you could lose your initial investment if the equities don’t perform well, as is true for any product that relies on fluctuations of the stock market. Shares ISAs can also be more time consuming if you want to manage your own portfolio, and providers are more likely to charge fees.
Yes you can, and this may be a good strategy if you are in a position to spread your savings across more than one account and are looking to reap the possible rewards of both options.
Don’t forget however, the total amount you can invest in all your ISAs tax free in one year cannot exceed £20,000 – and this rule applies even if one is a cash ISA and the other is a shares ISA.
If you already have a cash ISA and decide that you’d like to transfer all or part of it to a stocks and shares ISA, you are permitted to do this.
However, if you have paid into the ISA you’re transferring money from during the current tax year, you will have to transfer the whole balance. You can choose how much you want to transfer from an ISA you’ve contributed to in previous years.
Lifetime ISAs or LISAs are another type of long-term savings account you may have heard of, and these can also be based either on cash or on investments. The pros and cons of each are subject to the same rules as those described above: more potential reward equals more risk.
On top of the gains you could make in interest and/or returns on investments, you’ll benefit from a 25% government bonus on savings up to £4,000 a year. The bonus is applied to both cash-based and stocks and shares lifetime ISAs.
However, to be eligible to open a LISA of any kind, you’ll need to be aged between 18 and 39, saving either for your first home or for retirement, and you won’t have access to your money until you’re in a position to buy that first property, or until you hit retirement age.
Can I have a Lifetime ISA and any other type of ISA at the same time?
You can have a Lifetime ISA or any kind at the same time as standard cash or investment ISA, but you will still be subject to the £4,000 annual cap for the government bonus on your LISA, and anything you save in your LISA will also count towards the £20,000 tax-free ISA limit.
What are the alternatives?
Depending on circumstances such as your age, your reason for saving and other factors, there may be several options available if you want to explore other ways of saving. These include but are not limited to:
- Lifetime ISAs or “LISAs”: designed to help you save for a first home or retirement
- Junior ISAs can be set up by a parent or guardian for a child under 16
- Traditional savings accounts (interest is taxed above £1,000)
- Holding savings in an interest-paying current account
- Investing in property, such as purchasing a buy-to-let property
- Increasing payments into a pension.
- Purchasing premium bonds
Get advice from an expert on which ISA is best for you
If you’re still not sure which ISA is right for you or even if you want to look into a different investment option altogether, the experts we work with are ideally placed to help you find the best solution for your savings.
Call us on 0808 189 0463 or make an enquiry today and we’ll be in touch soon to discuss your requirements. We won’t charge you for the consultation and there’s absolutely no obligation on your part.