As the start of the new tax year approaches, along with the ISA limit increasing to £20,000, there seems no better time to compare the two main type of ISAs available: Cash and Stocks & Shares ISAs.
Cash ISAs traditionally have been the most popular type of ISA. However, there is currently no Cash ISA available on the market that pays enough to beat the rate of inflation. As interest rates reach a record low of 0.25% and inflation rises to 1.8%, Cash ISAs could in fact be losing you money.
Cash ISAs hold your money and pay interest based on the interest rates of the account. These accounts are practical if you intend to use the cash in the short-term.
- Earn tax-free interest on your cash savings
- All UK residents over the age of 16 can open an account
- Instant access to cash if you hold a variable rate account
However, with a Cash ISA, the interest received on your savings is set at either a fixed or variable rate. There are a few factors you should keep in mind:
- Teaser rates that are higher for a short period before dropping to a lower level
- Low interest rates, current interest rates are below inflation, which means money is losing value over time
- Fixed-term Cash ISAs have penalities and potential charges on early withdrawals
Stocks & Shares ISAs
With a Stocks & Shares ISA your savings are invested into investment trusts, single company shares and more. This type of ISA is potentially suitable for long-term investment of at least five years. Stocks & Shares ISAs have the potential for much greater returns than a Cash ISA, with the average return of 7.4% between 2014/15 compared to 1.53% for a Cash ISA.
Why Invest a Stocks & Shares ISA?
- Decide between different types of investment including trusts and individual shares
- Level of risk in your Stocks & Shares ISA is decided by you
- Can sell the assets held in your Stocks & Shares ISA at any time and there is no minimum length of time you need to hold it
Benefits of Investing in an ISA
While a Cash ISA is simply a tax-free savings account, a Stocks & Shares ISA is a tax-efficient investment account that lets you put money into a range of different investments, including unit trusts, open-ended investment companies and investment trusts, as well as Government bonds and corporate bonds.
Stocks & Shares ISAs offer the possibility of higher returns than Cash ISAs, but only if you’re happy to take some risks with your savings.
You can deposit your savings into a Cash ISA, Stocks & Shares ISA, or a combination of the two. The account you choose will depend on the length of time you want to invest and your attitude to risk.
Overall, if you are looking for a short-term tax-free savings account with low returns, then a Cash ISA is likely to be suitable for you. However, if you are looking to invest long-term and potentially receive higher returns, then a Stocks & Shares ISA could be a sensible option to reach your personal finance goals.Learn More about Our Stocks & Shares ISA
Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.