Deciding between a cash ISA and a stocks and shares ISA
The 2017/18 tax year annual allowance for an ISA is £20,000(Opens new window) and this can be split in any proportion between a cash ISA (Individual Savings Account) and a stocks and shares ISA. Generally speaking, stocks and shares ISAs have better growth potential than cash ISAs, but they can also fall in value and are more risky than cash ISA’s.
Once your money is in an ISA any interest, dividends or growth that it generates won’t be diminished by income tax or capital gains tax.
Please note, this page is for information only. We do not offer Cash ISAs.
The value of a stocks and shares ISA will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a stocks and shares ISA will not provide the same security of capital associated with a cash ISA. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
How can I buy an ISA?
Investing in an ISA is a three-part process:
The first thing you have to do is choose between a cash ISA and a stocks and shares ISA;
The second is to choose your provider;
The third stage is, if you selected a stocks and shares ISA, picking the specific investments you want to put inside the stocks and shares ISA and you can do this on your own or get advice from a financial adviser(Opens new window). You can change the investments you hold within the stocks and shares ISA without affecting your annual ISA allowance. Be aware that in some circumstances, the ISA investments that can be applied to the ISA may be restricted by the ISA manager and by legislation.
A cash ISA works just like a savings account, except you won’t have to pay income tax on the interest you earn. Some cash ISAs will give you instant access to your savings, while others demand that you keep the money there for a fixed amount of time. You can also choose between a fixed interest rate or a variable interest rate for your savings.
Please note, this is for information only. We do not offer Cash ISAs.
Stocks and Shares ISAs
You can choose different investments for your stocks and shares ISA, from individual company shares through to a selection of funds run by professional fund managers with a variety of different types of investment style. With many companies you can opt for fund solutions - these aim to make investing easy by offering a package of different investments held in one fund, designed to meet a risk appetite or a particular savings need.
Always bear in mind – with a stocks and shares ISA the value of an investment can fall as well as rise for a number of reasons, for example market and currency movements. You could get back less than originally invested.
Deciding between the two
There are three main factors to consider when deciding between a cash ISA and a stocks and shares ISA and these are: the length of time you’ll be saving/investing, your appetite to risk, and the impact of inflation.
The higher the risk profile of your investments the more likely they are to experience significant fluctuations in value and this is why it’s important to match the investment risks you take with your personal circumstances and the level of risk you’re comfortable with. If you’re not confident in choosing your own investments, a financial adviser can help identify your risk appetite and investments that are aligned to it.
In contrast, cash will rise in line with the interest rate payable on your cash ISA aiming to deliver slow and steady growth.
But if inflation is higher than the rate of interest you’re earning on your cash ISA - the real value of your money will fall over time. Slowly the buying-power of your savings will be eroded and so keeping your money in cash may not be a risk-free option as many savers believe.
This is particularly true in today’s low interest rate environment and between 1st January 2007 and 31st December 2016 cash offered an annual return of 1.5% while CPI (Consumer Price Index) inflation was running at 2.3%.**
It’s important to think about how you'll use your full ISA allowance if you can afford to. And if you’re looking to maximise your returns in the long term then you should investigate how a stocks and shares ISA could help you do that.
**Source: Morningstar Category. Cash vs CPS. Currency: Base Currency. Calculated on 22/03/17.