Cash ISA or a Stocks & Shares ISA?
When selecting a tax-free Individual Savings Account to put your money into, there’s many things to consider including how quick and easy it will be to access your money, whether you’ll retain your purchasing power, and whether your capital is at risk.
Cash ISAs
Cash ISAs work like a normal savings account with the added bonus that returns are not subject to income tax.
They’re easy to access if you need to withdraw your cash. However, if you withdraw money and later put it back in, this could count towards your annual ISA limit.
Be aware of inflation and compare it with your Cash ISA interest rate. When the interest paid to your ISA account is less than inflation, the purchasing power of your money decreases.
They are risk-free returns as long as the ISA provider is covered by the FSCS (up to a limit of £85,000).
Stocks & Shares ISAs
Stocks & Shares ISAs invest in equities and bonds or funds which are tradeable.
There is delay in accessing your money when you request it, since your investments will technically need to be sold before your money is released to you.
The value of your investment may increase or decrease depending on the performance of the equities/funds you have invested in. This means your capital is at risk.
Investments have the opportunity for long-term growth so you are more likely to retain the purchasing power of your money as the inflation may have less of an effect on your savings. But be aware that investments will fluctuate due to rises and falls in the underlying assets. Therefore, you’ll need to comfortable with the risk of investing.
Up to £50,000 of your investments are protected if your FSCS-covered ISA provider goes into liquidation.
The Differences
There are several key differences between Cash and Stocks & Shares ISAs. Whether they’re right for you will depend on your circumstances and what you hope to achieve from your savings.
- Do you want long term savings which will stay above inflation, or do you want to put your money aside in an easy-access account to use within the next couple of years?
- A Cash ISA is a safe bet for short-term savings and if you need to access the cash quickly then keeping money in a cash ISA would be a suitable option.
- A Stocks & Shares ISA are more suitable for long-term savings, as they can increase faster than inflation and protect your purchasing power. However, you’ll have to be comfortable with the fact that your investments can go up and down in value.
- A Cash ISA has no charges associated with opening or keeping the account.
- Stocks & Shares ISA will be subject to charges from the fund manager and the provider whom you invest through. These charges can vary widely, so it is crucial investors are aware of any charges before investing.
You can have both a Cash ISA and a Stocks & Shares ISA at the same time. Be sure that you don’t go over your annual ISA limit across the two accounts and ensure that you’re saving into the right account for your savings goals.
To understand more, read our full ISAs Explained.