Is a cash ISA really right for you?

Kat Mann


read 5 min

Since it was introduced in 1999, the individual savings account – or ISA – has proved to be a popular way for many Brits to save and invest for their future in a tax efficient way. But should you save in a cash ISA or invest in a stocks and shares ISA? 

Can I have a cash ISA and a stocks and shares ISA?

Firstly, it’s worth clarifying that yes, you can have more than one ISA and yes you can pay into a cash ISA and a stocks and shares ISA. However, your ISA allowance of £20,000 a year will cover all your ISAs. So, the total untaxed amount invested per year in all your combined ISAs cannot surpass £20,000. For example: if you invested £12,000 in your cash ISA, you would only have £8,000 left to invest tax-free in your stocks and shares ISA. Also, you’re only allowed to pay into one of each type of ISA each tax year. This means that you can pay into a cash ISA and a stocks and shares ISA in one year, but not into two different cash ISAs. 

Thinking about your ISA strategy can not only put you on a solid financial footing for the 2021/22 tax year, but for the next one too.  

Get your head around the pros and cons of a stocks and shares ISA versus a cash ISA and you could well be in a position to ‘set and forget’ – by which we mean you can do what you need now and not worry yourself for the next 12 months or more 

First the basics: An ISA is a way to save or invest without paying tax on the growth, returns or interest. 

While there are a few different ISAs available for adults in the UK, there are two main types: cash ISAs and stocks and shares ISAs. 

If you’re aged 18 to 39 and looking to save for your first home or put money aside for your retirement with the help of a 25% bonus from the government, then a Lifetime ISA might be worth considering. Available as a cash or stocks and shares option, the Lifetime ISA has an annual allowance of £4,000, which is deducted from your overall £20,000 ISA allowance. Nutmeg offers a stocks and shares Lifetime ISA and there’s more information about them here 

Every year the government gives us a tax-free ISA allowance; for the current tax year ending on 5th April 2022, the allowance is £20,000. It’s up to you to decide whether to put your whole allowance into a cash ISA or stocks and shares ISA, or to split it across the different types.

Choosing your ISA strategy

How do you decide which ISA ‘strategy’ is right for you? In the current climate of low interest rates and rising inflation, cash ISAs are losing value in real terms, so some people are turning to stocks and shares ISAs for potentially better returns. 

But it’s not as clear cut as that – here’s a quick overview of the two main ISA types to help you decide for yourself. 

Cash or stocks and shares — what’s the difference?

The cash ISA 

A  cash ISA  works like a normal savings account, and most high street banks offer several types. Instant access cash ISAs, for example, can be good for people with short term goals or people who may need to access their savings.  

However, interest rates have been low for some time now, and, with inflation steadily creeping up, the real value of money held in cash is going down. Which is not great news for people saving in cash ISAs.

The stocks and shares ISA 

A stocks and shares ISA, on the other hand, is very different to a standard bank account. With this type of ISA, you’re not saving money – you’re investing it. Stocks and shares ISAs, over the longer term, could deliver a higher return than a cash ISA and you are more likely to keep pace with inflation.  

However, there’s no such thing as a free lunch. The price you pay for this potentially higher return is a greater level of risk to your money. As a stocks and shares ISA is an investment, the capital you put in isn’t protected from rises and falls in the value of the underlying assets. This means you can get back less than the amount you originally invested, so you need to make sure you’re comfortable with the risk before committing. 

Open an ISA Today

Why would I choose a cash ISA? 

Generally speaking, cash is a safe bet for short-term savings. 

If there’s a possibility you’ll need cash for an emergency or you’re saving for a specific goal within the next few years, keeping your money in a cash ISA may be a good option. 

Why would I choose a stocks and shares ISA? 

A stocks and shares ISA offers the possibility of better returns in the long run. 

So, if you’re planning for your future, trying to make the most of your money over the longer term, and understand there are risks associated with investing, you might want to invest in a stocks and shares ISA. 

Your allowance doesn’t carry over

It’s not possible to carry forward any unused ISA allowance from one tax year to the next. So, if you can, it’s best to use your full ISA allowance every year. Whether you  invest in stocks and shares, save in cash, or do a bit of both, ISAs are an easy, tax-efficient way to make the most of your money. 

Risk warning:

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not reliable indicators of future performance. 

A stocks and shares ISA may not be right for everyone and tax rules may change in the future.  

A stocks and shares Lifetime ISA may not be right for everyone. You must be 18–39 years old to open one. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. So you may get back less than you put in. Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

If you are unsure if an ISA or Lifetime ISA is the right choice for you, please seek independent financial advice. 

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Kat Mann
Kat is the head of PR and savings and investment specialist at Nutmeg and has a passion for pensions, investing and all things financial literacy and financial independence. Having worked in the investment and wealth management industry for over a decade for institutional and consumer investment brands, as well as the consumer champion Which?, Kat has been recognised as one of the most influential women working in FinTech by Innovate Finance for the last two years.

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