Cash ISAs v Stocks and Shares ISAs – What’s best for me?
Tuesday, January 26, 2016
It’s a tough time to try and get a decent return on your savings – and that’s why Stocks and Shares ISAs deserve some serious consideration.
When thinking about saving for your or your child’s future, choosing what type of ISA to go for – Stocks and Shares or Cash – depends on a number of factors, and you can start by asking yourself some questions.
- What’s your savings goal?
- How long do you plan to save for?
- How do you feel about balancing risk and reward?
Let’s start by taking a look at some Individual Savings Accounts (ISAs) basics:
What is an ISA?
- ISAs are simply a type of savings account where you don’t pay tax on the interest on the money you keep in them, unlike standard savings accounts where tax is taken from the interest earned.
- Is there a difference between ISAs and NISAs? They were originally called ISAs, and when the government changed some of the ISA rules in the 2014 Budget, they called them the New ISAs,
- or NISAs. Providers use either name now.
Who are ISAs for and how much can I save?
- Anyone over 16 can open a Cash ISA, and over 18s can open a Stocks and Shares ISA.
- Each April, you have a fresh allowance (the amount you can save into an ISA) to use and, crucially, once money is in there, it stays tax-free, year after year. Someone who’d filled their ISA allowance every year since they started in 1999 could now have around £100,000, including interest protected from the taxman.*
- You are only allowed to put money into one Cash ISA and one Stocks and Shares ISA in a tax year. You can put all your annual savings allowance into one type of ISA, or you can split it between the two types however you like.
- You can pay in a lump sum, or save monthly; and you can top up your ISA through out the year too.
- You can withdraw your money free of tax, although check with your provider for their rules on accessing your money as these can differ.
So, while many of the ISA rules and regulations are the same for all ISA products, there are some key differences between the two types of ISA – Cash, and Stocks and Shares.
What are cash ISAs and how do they work?
- Works much the same as an ordinary savings account, but you don’t pay tax on any interest earned
- Instant access, regular savings, and fixed term options available
- No set up fees to pay
- Suitable if you prefer to have lower investment risks
Stocks and Shares ISAs explained
- Unlike a Cash ISA you are not just saving money, but investing it in different asset types such as stocks and shares, with a view to growing your savings over the longer term
- You don’t pay tax on any income or capital gains made on your investments
- Stocks and Shares ISAs provide an opportunity for a better return on your savings over the longer term, depending on the performance of the investment
- You can withdraw your money at any time, although different providers have different rules and conditions, withdrawals cannot be replaced and replacement would count towards your annual ISA limit. Depending on how long you’ve had the plan and when you withdraw money, as with any investment linked to the stock market, you could end up getting back less than you put in.
Short or long term savings - which is best for me?
If you want to play it on the safer side, the conclusion is, put your money into a Cash ISA. If you’re happy to balance an element of risk with a greater opportunity for your funds to flourish over a longer period, then perhaps you should plump for a Stocks and Shares ISA - they come in different formats – some are ready made and others give you the option to choose which funds to invest in, and they also have varying levels of risk.
At Foresters, for example, because we are owned by and operated for our members (there are no shareholders to pay), we take a responsible, long-term approach to savings and investments. Our With Profits savings plans sit comfortably between lower-risk cash savings and higher-risk stocks and shares.
Find out more about getting started with ISAs
- Tax rules may change and depend on individual circumstances.
- You should be aware that you may not get back what you pay into a Stocks & Shares ISA dependent on the investment term and investment conditions on withdrawal. The content of this article is for information purposes only and does not constitute financial advice. We do not offer financial advice. If you're unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.
*Source: Martin Lewis Six reasons why ISAs still beat other savings accounts