A saviour for savers? Stocks and shares ISA vs cash ISA
Do you have an ISA? Ask yourself - what am I saving for?
The ISA limits are high these days – as a couple, you could invest up to £40,000 in ISAs per year, as the individual limit increased to £20,000 on 6th April 2017.
ISAs are useful for savings because any growth you achieve is free of tax and you can usually cash them in when you want to.
Also, you don’t have to declare any investments held in ISAs on your tax return. This may not seem like much, but if you do have to file an annual tax return, you’ll know that any kind of simplification of administration is very welcome!
Cash vs stocks and shares
There are two main types – cash ISAs that invest in cash (of course!) and investment ISAs that invest in the stock market. Your allowance can be used for both.
Cash ISAs don’t tend to fall in value so they are good for short term savings. However, interest rates tend to be low and over a longer period they won’t keep up with inflation. For example, if you had £1,000 10 years ago, its real value today (in terms of what you could actually buy with it) would be £789.
Investment ISAs have the potential to grow more, but over the short term they can fluctuate in value and if you need to cash in when markets are low, you might get back less than you put in. For example, an ISA invested in the top 100 UK shares over the past 32 years grew more than the highest-paying cash ISA, but its value fell one out of every four years.
So maybe consider two ISAs – one for short and one for long term savings.
Let’s look at examples of both:
If you are daunted by the thought of stocks and shares remember you can get ISAs where experts monitor the investments for you and you can choose the level of risk that you are comfortable with. The Lemonade ISA works like this.
Buying a house?
If you are saving to buy a house, you may be totally baffled by the differences between the Help to Buy ISA and the new Lifetime ISA (LISA). We have put together a useful guide and comparison table to help you work out which option is best for you.